STRUCTURED SETTLEMENTS AND SINGLE-CLAIMANT …...structured settlements, it became clear, at least...

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STRUCTURED SETTLEMENTS ANDSINGLE-CLAIMANT QUALIFIED

SETTLEMENT FUNDS: REGULATING INACCORDANCE WITH STRUCTURED

SETTLEMENT HISTORY

Jeremy Babener*

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 R

I. WHAT IS A STRUCTURED SETTLEMENT? . . . . . . . . . . . . . . . 6 R

A. A Popular Tool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 R

B. The Typical Structured Settlement . . . . . . . . . . . . . . . 9 R

C. A Tax Subsidy at Work . . . . . . . . . . . . . . . . . . . . . . . . . 11 R

II. STRUCTURED SETTLEMENTS: BIRTH, SUBSIDY,JUSTIFICATION, AND DOCTRINE . . . . . . . . . . . . . . . . . . . . . . . 16 R

A. The Birth and Growth of Structured Settlements . . 18 R

B. The Two Revenue Rulings that ChangedEverything . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 R

C. Codification and More. . . . . . . . . . . . . . . . . . . . . . . . . . . 22 R

D. Extrapolating a Justification from the LegislativeHistory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 R

E. Congressional Justifications in Hindsight . . . . . . . . . 27 R

III. ALLOWING CONSTRUCTIVE RECEIPT AND ECONOMIC

BENEFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 R

A. Congress’s U-Turn on Plaintiffs’ Need to AvoidEconomic Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 R

B. Eroding Constructive Receipt Through Factoring . . 31 R

C. The IRS Extends the Section 104(a)(2) Exclusionto Factoring Transactions . . . . . . . . . . . . . . . . . . . . . . . . 35 R

* Jeremy Babener is a 2010 J.D. Candidate at New York University School ofLaw. The author would like to thank Patrick J. Hindert and Richard B. Risk, Jr. forvaluable comments on a previous draft. In addition, those in the structured settlementindustry made much of the current and practical information in this Article possible,including those at the National Structured Settlements Trade Association, the NationalAssociation of Settlement Purchasers, and the Society of Settlement Planners. Lastly,thanks also to Gail K. Johnson of the Department of Justice’s Federal Tort Claims ActSection for her limitless mentorship, and New York University School of Law Profes-sor Lily Batchelder for her guidance and support.

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2 LEGISLATION AND PUBLIC POLICY [Vol. 13:1

D. Federal and State Legislatures Pass LawsImplicitly Approving Factoring . . . . . . . . . . . . . . . . . . 36 R

E. Should Structured Settlement Recipients BeAllowed to Factor? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 R

1. The Right to Factor . . . . . . . . . . . . . . . . . . . . . . . . . 42 R

2. Factoring Discount Rates . . . . . . . . . . . . . . . . . . . . 44 R

3. Undermining and Promoting the Subsidy’sPurpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 R

F. Looking Back at Where Congress Began . . . . . . . . . 48 R

IV. HELPING THE WRONG PARTY. . . . . . . . . . . . . . . . . . . . . . . . . 49 R

A. Capturing the Monetary Benefits of a StructuredSettlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 R

1. Negotiating on Nominal Terms . . . . . . . . . . . . . . 52 R

2. Defendants’ Insurers Can Profit fromStructured Settlements . . . . . . . . . . . . . . . . . . . . . . . 55 R

3. Defendants Can Capture Some of the TaxSubsidy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 R

B. Defendants’ and Liability Insurers’ Capture MayDetract from the Subsidy’s Goal . . . . . . . . . . . . . . . . . 57 R

V. THE NEXT STEP AWAY FROM THE TWO TAX

DOCTRINES: QSFS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 R

A. QSFs: More Erosion of Tax Doctine . . . . . . . . . . . . . 61 R

B. Capturing More Benefits Through a Single-Claimant QSF. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 R

C. Ending the Debate Over Single-Claimant Section468B Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 R

D. An Acceptable Erosion of Tax Doctrines: OneStep Further on the Path . . . . . . . . . . . . . . . . . . . . . . . . . 77 R

CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 R

INTRODUCTION

In 1982, Congress created a subsidy for a relatively new type ofsettlement: the structured settlement. Rather than paying plaintiff1

with a single check of $1 million, defendant pays plaintiff $2 millionin increments over the next twenty years. As Congress would later

1. Because some personal injury settlements are made before a law suit is filed,the terms “plaintiffs” and “claimants” will be used interchangeably in this Article.Because the cost of settling is typically borne by a defendant’s liability insurancecarrier, Barbara D. Goldberg & Kenneth Mauro, Utilizing Structured Settlements, inEVALUATING & SETTLING A PERSONAL INJURY CASE: PLAINTIFFS’ AND DEFENDANTS’PERSPECTIVES 31, 35–36 (Practising Law Institute, 2001), the term “defendants” and“liability insurers” will be used interchangeably, unless distinguishing is necessary fora particular topic.


2010] STRUCTURED SETTLEMENT HISTORY 3

explain, spreading the receipt over a long period of time serves thepublic interest by preventing a plaintiff from prematurely dissipatingthat money,2 and possibly becoming dependent upon the state. Thus,it extended the income tax exclusion of personal injury settlementmonies to periodic payments, creating the structured settlement taxsubsidy.

In so doing, Congress emphasized the application of two well-established tax doctrines that would withhold tax subsidy eligibility ifviolated: constructive receipt and economic benefit. Congress madeclear that a personal injury plaintiff who obtained such control overtheir settlement funds would not receive the subsidy’s benefit. Thus,Congress established a monetary incentive to sacrifice control and im-mediate receipt of one’s settlement monies.

While the legislation immediately began increasing the use ofstructured settlements, it became clear, at least early on, that defen-dants were capturing much of the benefit by the conclusion of settle-ment negotiations. Though this usurpation may have lessened overtime as plaintiff advisors became more knowledgeable about struc-tured settlements, it continues today. During the last decade, plaintiffshave used a new entity to capture more of that benefit: the qualifiedsettlement fund.3 Plaintiffs agree with defendants on a lump-sum set-tlement amount, and direct that amount to a qualified settlement fund.Thereafter, plaintiffs can structure a settlement to maximize its bene-fits, without the conflicting objectives inherent in plaintiff-defendantnegotiations. Such a fund can be used over the objection or evenwithout the knowledge of defendants.

Because the use of this fund by single-claimants may break twoimportant tax rules that Congress originally applied to the structuredsettlement tax subsidy—the constructive receipt4 and economic bene-

2. Anecdotal evidence suggests that the vast majority of lump-sum settlement re-cipients prematurely dissipate their settlement moneys. However, though many havecited to the statistic that 90% of such recipients prematurely dissipate their monieswithin five years, the statistic has been found to be unsubstantiated. Jeremy N.Babener, Note, Justifying the Structured Settlement Tax Subsidy: The Use of LumpSum Settlement Monies, 6 N.Y.U. J. L. & BUS. 127 (2009); see Laura J. Koenig, Lies,Damned Lies, and Statistics? Structured Settlements, Factoring, and the Federal Gov-ernment, 82 IND. L. J. 809, 810 (2007); Adam F. Scales, Against Settlement Factor-ing? The Market in Tort Claims Has Arrived, 2002 WIS. L. REV. 859, 870, 873(2002).

3. See Part V.B.4. A taxpayer acquires constructive receipt of monies, though not actually in the

taxpayer’s possession, once the monies have been set aside for his or her exclusiveuse and can be drawn upon at any time. Treas. Reg. § 1.451-2(a) (as amended in1979); see infra note 80. R



fit doctrines5—it is unclear if such claimants can make use of quali-fied settlement funds and still access the subsidy. Thus, qualifiedsettlement funds have not been widely used because plaintiffs andtheir advisors do not want to risk the loss of the structured settlementtax subsidy.

Treasury regulations6 could cure the ambiguity, but should do soin accordance with structured settlement history, and in the interest ofpublic policy. Letters to the Treasury have been written for andagainst the approval of single-claimant qualified settlement funds be-ing eligible for the 1982 tax subsidy when establishing structured set-tlements. At least one law review article has also been written infavor of single-claimant qualified settlement funds.7 Building on priorwork, this Article will demonstrate how Treasury regulations ex-tending structured settlement tax subsidy eligibility to structured set-tlements produced by single-claimant qualified settlement fundswould, if found to violate tax doctrine, only constitute a further step in

5. A taxpayer acquires the economic benefit of monies when they are uncondition-ally and irrevocably transferred to him or her, though not necessarily accessible. Forexample, an employee acquires the economic benefit of an irrevocable contribution toa deferred compensation plan where the plan is vested in the employee and securedagainst the employer’s creditors. See Minor v. United States, 772 F.2d 1472, 1474(9th Cir. 1985) (citing Rev. Rul. 60-31, 1960-1 C.B. 174, 179); infra note 81 (discuss- Ring the well-known Sproull v. Comm’r decision). The doctrine has been called “alimited, technical device, created and advanced by the government in order to collecttaxes from cash basis taxpayers as soon as possible.” Thomas v. United States, 45 F.Supp. 2d 618, 625 (S.D. Ohio 1999). That court established three elements that, to-gether, trigger economic benefit:

(1) There must be some fund in which money or property has beenplaced;(2) The fund must be irrevocable and beyond the reach of the creditors ofthe party who transferred the funds to the escrow or trust; and(3) The beneficiary must have vested rights to the money, with receiptconditioned only on the passage of time.

Id. at 620 (1999) (citing Sproull v. Comm’r, 16 T.C. 244 (1951), aff’d, 194 F.2d 541(6th Cir. 1952)). The Court stated that a beneficiary’s interest in a fund is “‘vested’ ifit is nonforfeitable.” Id. at 621 (citing I.R.S. Gen. Couns. Mem. 33,733 (Nov. 21,1966)).

6. The Secretary of the Treasury, empowered to “prescribe all needful rules andregulations for the enforcement of [the Tax Code],” I.R.C. § 7805(a) (2006), has “del-egated much of this rulemaking authority to the I.R.S. Chief Counsel’s Office.” LE-

ANDRA LEDERMAN & STEPHEN W. MAZZA, TAX CONTROVERSIES: PRACTICE AND

PROCEDURE 31 (3d ed. 2009). Thus, while the Treasury Department remains the offi-cial source of such regulations, id., this Article alternatively calls for new regulationsfrom the Treasury and the Internal Revenue Service (IRS). Of course, Congress couldalso act to achieve the same result.

7. Richard B. Risk, Jr., A Case for the Urgent Need to Clarify Tax Treatment of aQualified Settlement Fund Created for a Single Claimant, 23 VA. TAX REV. 639(2004) [hereinafter Risk, A Case].



an ongoing deconstruction of the constructive receipt and economicbenefit doctrines, performed through legislative, administrative, andregulatory action. Moreover, the degradation of these doctrines, atleast in the context of single-claimant qualified settlement funds,would serve to fulfill the purpose of the original 1982 legislation, de-spite the apparent inconsistency. Thus, this Article recommends theissuance of Treasury regulations extending structured settlement taxsubsidy eligibility to structured settlements produced by single-claim-ant qualified settlement funds.

Part I introduces the reader to the use and popularity of structuredsettlements, explaining how the tax subsidy increases the value of astructured settlement. Part II details the early history of structuredsettlements, including the 1979 Internal Revenue Service (IRS) rulingsand 1982 legislation establishing the tax subsidy. It highlights boththe application of the economic benefit and constructive receipt doc-trines, as well as the purpose of the 1982 legislation: preventing pre-mature lump-sum dissipation. Part III narrates the subsequent erosionof the constructive receipt and economic benefit doctrines. It detailsthe birth and later implicit approval of “factoring,” the selling of struc-tured settlements by former claimants. This section suggests that theerosion of the two doctrines may in fact serve the purpose of the origi-nal 1982 legislation. Part IV demonstrates the need for the use ofsingle-claimant funds by elaborating on the methods defendants andtheir liability insurers have used to minimize settlement costs. Thissection argues that it is in the interest of public policy to direct thebenefits of structuring a settlement away from defendants, and towardplaintiffs, so long as structured settlements are not discouraged. PartV describes how single-claimant qualified settlement funds can beused to capture increased benefits for plaintiff, and argues that thecontinued erosion of the economic benefit doctrine in relation to struc-tured settlements is consistent with past erosion, and serves the pur-pose of the original 1982 legislation creating the tax subsidy.



I.WHAT IS A STRUCTURED SETTLEMENT?

A. A Popular Tool

As early as 1981, structured settlements8 were being hailed as“the wave of the future.”9 Predictions were made that “social and pro-fessional pressure”10 would require the consideration of structured set-tlements in negotiations.11 These predictions were proven out.12

By all accounts, structured settlements are being used with greatfrequency. In a large study of over 1,750 commercial liability bodilyinjury claims, 12% resulted in structured settlements.13 Approxi-mately one-third of injured victims offered a structured settlementagree to it.14 Together, these two pieces of information suggest that

8. The Tax Code defines a structured settlement as an arrangement established by(i) suit or agreement for the periodic payment of damages excludablefrom the gross income of the recipient under section 104(a)(2), or (ii) [an]agreement for the periodic payment of compensation under any workers’compensation law excludable from the gross income of the recipientunder section 104(a)(1) . . . [where periodic payments are] (i) of the char-acter described in subparagraphs (A) and (B) of section 130(c)(2), and (ii)payable by a person who is a party to the suit or agreement or to theworkers’ compensation claim or by a person who has assumed the liabil-ity for such periodic payments under a qualified assignment in accor-dance with section 130.

I.R.C. § 5891 (2006) (defining the term for purposes of section 5891). Section130(c)(2) provides, “(A) such periodic payments are fixed and determinable as toamount and time of payment, (B) such periodic payments cannot be accelerated, de-ferred, increased, or decreased by the recipient of such payments.” I.R.C.§ 130(c)(2)(A)–(B) (2006).

9. Howard Rudnitsky & Jeff Blyskal, Something for Everyone, FORBES, 29, 29(Jan. 19, 1981) (quoting attorney Fred Levin upon agreeing to a structured settlementworth over $10 million).

10. Structuring Settlements: A Roundtable, 19 TRIAL 70, 80 (Jan. 1983) [hereinafterA Roundtable] (comments of Lawrence Charfoos).

11. Id. By 1983, commentators were projecting that plaintiff attorneys might soonface malpractice suits for not informing their clients of the option. Id. at 79 (com-ments of Herb Cumming); see also Amy J. Conner, Is Plaintiffs’ Lawyer Liable forNot Offering Structured Settlement?, LAW. WKLY. USA, Aug. 6, 2001, at 1, availableat http://www.jmwsettlements.com/structured_settlements/Article%20Reprints/Law-yersWeeklyGrillo080601.pdf.

12. Christopher R. Gullen, What Attorneys Need to Learn From Grillo v. Pettiete,MICH. B. J., Aug. 2003, at 28 (discussing a legal malpractice settlement for more than$4 million resulting from a former personal injury plaintiff suing the attorney andguardian ad litem, both of whom recommended the acceptance of a cash settlement).

13. INSURANCE SERVICES OFFICE, INC., CLOSED CLAIM SURVEY FOR COMMERCIAL

GENERAL LIABILITY: SURVEY RESULTS, 1997, 22 (1997) [hereinafter ISO SURVEY](finding that nearly 25% of the claims where claimants received over $300,000 in-volved structured settlements).

14. Tax Treatment of Structured Settlements: Hearing Before the Subcomm. onOversight of the H. Comm. on Ways and Means, 106th Cong. 38 (1999) (statement of



more than a third of personal injury claimants are offered a structuredsettlement. So much use amounts to over $6 billion of structured set-tlement premiums being purchased each year,15 an estimated 5% ofthe $130 billion of total annual personal injury settlements.16 Eventhe 2008 financial crisis does not appear to have significantly harmedthe structured settlement industry.17 Because structured settlementshave been available for over three decades, there are currently twomillion Americans holding some $100 billion in structuredsettlements.18

Thomas W. Little, Former President of National Structured Settlements Trade Associ-ation, on behalf of the NSSTA); Letter from Malcolm Deener, President, NSSTA, toGregory F. Jenner, Acting Assistant Secretary for Tax Policy, Department of the Trea-sury, and Donald L. Korb, Chief Counsel, I.R.S. (May 10, 2004), available at http://www.risklawfirm.com/files/DeweyBallentineltrtoSenBaucus06-29-04.pdf [hereinafterNSSTA Letter].

15. Risk, A Case, supra note 7, at 644 n.13 (citing Press Release, Peter Arnold, RNSSTA, Structured Settlements Industry Maintains Surging Popularity in 2002 (Jan.30, 2003)); cf. Scales, supra note 2, at 882 n.72 (citing Press Release, National Struc- Rtured Settlements Trade Ass’n, Structured Settlements Industry Reports 19 PercentSurge in Demand During 2001; $6.05B Is Best Year in History (Feb. 5, 2002)). In thepast, some have estimated the value to reach some $10 billion, Tax Treatment ofStructured Settlements: Hearing Before the Subcomm. on Oversight of the H. Comm.on Ways and Means, 106th Cong. 78 (1999) [hereinafter 1999 Hearing] (writtenstatement of J.G. Wentworth, a finance company that purchases and securitizes struc-tured settlements), or even $12 billion. Anthony Riccardi & Thomas Ireland, A Pri-mer on Annuity Contracts, Structured Settlements, and Periodic-Payment Judgments,12 J. LEGAL ECON. 1, 8 (2002–2003) (citing http://www.nssta.com).

16. See Christopher Sheffield, Evolve Financial Division Ramps Up Marketing toGrow Settlement Business, MEMPHIS BUS. J., Feb. 1, 2008, available at http://bir-mingham.bizjournals.com/memphis/stories/2008/02/04/story11.html. The study byTowers Perrin reported total tort costs in the United States of $252 billion in 2007.TOWERS PERRIN, 2008 UPDATE OF U.S. TORT COST TRENDS 3, available at http://www.towersperrin.com/tp/getwebcachedoc?webc=USA/2008/200811/2008_tort_costs_trends.pdf. The total incorporates the benefits paid or expected to be paid tothird parties, defense costs, and administrative expenses. Id. at 8. Patrick J. Hindert,author of STRUCTURED SETTLEMENTS AND PERIODIC PAYMENTS, suggests that pay-ments to injury victims and their attorneys reached $161 billion in 2006, based on oneof the Towers Perrin study principals. Patrick J. Hindert, Structured SettlementSurveys, BEYOND STRUCTURED SETTLEMENTS, Nov. 23, 2008, http://s2kmblog.typepad.com/rethinking_structured_set/2008/11/structured-settlement-surveys.html.

17. Some in the industry believe that the current economic uncertainty and declin-ing investment performance drives more people to consider structured settlements.Telephone Interview with Betty Gregware, Sales Executive, John Hancock Life Insur-ance Co. (Feb. 29, 2009) [hereinafter Gregware Interview]; E-mail from John McCul-loch, Vice President National Marketing Director, EPS Settlement Group, Inc., toJeremy Babener, J.D. Candidate, Class of 2010, New York University School of Law(Feb. 9, 2009, 8:30:59 EST) (on file with author) [hereinafter McCulloch E-mail](predicting increased use of structured settlements as a result of a “flight to quality”).

18. See Press Release, J.G. Wentworth, The #1 Reason Consumers Sell TheirStructured Settlements Is to Pay Bills, According to Survey by J.G. Wentworth (Nov.



Unsurprisingly, an industry has spawned and expanded to meetand drive demand. As of 2000, there were approximately 430 full-time structured settlement brokers.19 As of 2001, more than twodozen insurance companies were selling structured settlementannuities.20

Early on, structured settlements faced opposition within theplaintiff attorney field.21 By 1983, however, some plaintiff attorneyswere already initiating structured settlement discussions of their ownaccord.22 Currently, they are applauded by plaintiffs, defendants, andbrokers alike.23 The National Structured Settlements Trade Associa-tions (NSSTA) can point to many supporters of structured settle-ments.24 For example, Andrew J. Imparato, the President of theAmerican Association of People with Disabilities, said, “[s]tructuredsettlements are a model benefit for people with disabilities.”25

Because the tax exemption favors the plaintiff, defendant, andbroker,26 the exemption rarely faces serious scrutiny. Perhaps themost thorough examination, aside from a rare few academic articles,was provided by a sister industry spawned in the 1990s.27 The “fac-toring”28 industry, populated by companies who purchase the futurestream of income of a structured settlement annuity from formerclaimants, was strongly criticized by the structured settlement selling

4, 2008), available at http://www.jgwentworth.com/About/News/Press/Detail.aspx?i=46 [hereinafter The #1 Reason].

19. Richard B. Risk, Jr., Structured Settlements: The Ongoing Evolution From aLiability Insurer’s Ploy to an Injury Victim’s Boon, 36 TULSA L.J. 865, 879 (2001)[hereinafter Risk, Structured Settlements].

20. Id. at 878.21. Vasilios B. Choulos, Structured Settlements: Cure or Curse?, 16 TRIAL 73, 74

(Nov. 1980).22. A Roundtable, supra note 10, at 72 (comments of Herb Cumming). R23. See Scales, supra note 2, at 887. R24. National Structured Settlements Trade Association, Independent Voices, http://

www.nssta.com/i4a/pages/index.cfm?pageid=3291 (last visited Jan. 20, 2009).25. Id. (quoting Andrew J. Imparato, President, American Association of People

with Disabilities).26. Scales, supra note 2, at 887. R27. Margaret Mannix, Settling for Less: Should Accident Victims Sell Their Monthly

Payouts?, U.S. NEWS & WORLD REP., Jan. 25, 1999, at 62; Vanessa O’Connell, LikeIt Or Lump It: Thriving Industry Buys Insurance From Injured Plaintiffs, WALL ST.J., Feb. 25, 1998, at A1.

28. The term “factoring” was once used as a derogatory term by insurance compa-nies; however, since incorporation into federal law, I.R.C. § 5891 (2006), the term hasbeen increasingly used by purchasing company insiders. Telephone Interview withMatt Bracy, General Counsel, Settlement Capital Corp. (Mar. 12, 2009) [hereinafterBracy Interview].



industry in the mid and late 1990s.29 Much of the negative criticismof the structured settlement industry was made during this time.30

B. The Typical Structured Settlement

The typical structured settlement is agreed to after a lawsuit hasbeen filed,31 but before substantial involvement by a judge.32 Struc-tured settlements vary in value. One large survey found that two-thirds of claims using structured settlements involved “major injuries,”averaging a total payout of $408,000.33 The other one-third percentaveraged a total payout of $210,000.34 However, testimony on behalfof the factoring industry represented that more than half of structuredsettlement premiums fall below $50,000, and that less than 13% ex-ceed $250,000.35 In any case, some practitioners suggest that a struc-tured settlement can be created for $10,000 or $20,000,36 thoughvalues as low as $5,000 and $2,700 have been reported.37 The aver-age stream of periodic payments guaranteed by a structured settlementis for twenty years.38 However, structured settlements commonly in-clude life-contingent payments as a component.39

29. Risk, Structured Settlements, supra note 19, at 883. R30. See infra Part III.31. Telephone Interview with Jack L. Meligan, Plaintiff Loyal Settlement Planner,

Settlement Professionals Inc. (Feb. 5, 2009) [hereinafter Meligan Interview].32. E-mail from William L. Neff, Partner, Hogan & Hartson LLP to Jeremy

Babener, J.D. Candidate, Class of 2010, New York University School of Law (Feb.23, 2009, 19:29:04 EST) (on file with author) [hereinafter Neff E-mail, Feb. 23,2009].

33. ISO SURVEY, supra note 13, at 22. R34. Id.35. 1999 Hearing, supra note 15, at 17 (statement of John E. Chapoton, Partner, R

Vinson & Elkins, L.L.P., on behalf of the National Association of SettlementPurchasers).

36. Leo Andrada, Structured Settlements: The Assignability Problem, 9 S. CAL. IN-

TERDIS. L.J. 465, 468, 472 (2000). Life insurance companies set minimum annuityvalues. McCulloch E-mail, supra note 17. For example, John Hancock Life has a Rpolicy minimum of $10,000. Gregware Interview, supra note 17. R

37. Meligan Interview, supra note 31. Meligan cites the $2,700 structured settle- Rment as a one-time occurrence, and $5,000 structured settlements as rare, occurring athis office perhaps once per year. Id. Structured settlements for $20,000 are seenmore regularly. Id.

38. 1999 Hearing, supra note 15, at 19 (written statement of John E. Chapoton, RPartner, Vinson & Elkins, L.L.P., on behalf of the National Association of SettlementPurchasers).

39. E-mail from Craig H. Ulman, Counsel to NSSTA to Jeremy Babener, J.D. Can-didate, Class of 2010, New York University School of Law (Feb. 16, 2009, 16:06:14EST) (on file with author) [hereinafter Ulman E-mail, Feb. 16, 2009]. Life contingentpayments are periodic payments made to a beneficiary until their death. See generallyBLACK’S LAW DICTIONARY (West 8th ed. 2004) (defining “annuity”).



Not all of a defendant’s payment40 is typically used to purchasean annuity.41 On average, half of the payout is transferred as an up-front lump-sum to plaintiff, while the other half is paid through thepurchase of an annuity42 via a structured settlement company.43 Fromthe latter purchase, a structured settlement broker will typically re-ceive a commission of between 2%44 and 4%.45

Anti-assignment clauses, stipulations in the contract preventingplaintiff from transferring rights to the future stream of income, haveoften been included in settlement agreements.46 However, these arenot necessarily followed,47 and some courts choose not to enforcethem.48 The practice of “factoring,” selling one’s right to receive fu-

40. The cost of the structured settlement is typically borne by a defendant’s liabilityinsurance carrier. Goldberg & Mauro, supra note 1, at 35–36. R

41. See Thomas C. Downs, Superfund Colloquium: Periodic Payment of Claims:New Hope for CERCLA Settlements?, 8 TUL. ENVTL. L.J. 387 (1995).

42. ISO SURVEY, supra note 13, at 22; Gregware Interview, supra note 17 (making Ra back-of-the-envelope estimation that, of those settlements with structured compo-nents, perhaps 40% to 50% of the total settlement is structured). Structured settlementcompanies are often subsidiaries of insurance companies. See Dan Luther, TrustsMay be Superior to ‘Structured Settlements’, 129 TRUSTS & ESTATES, 28, 28 (Dec.1990).

43. As will be seen in the next section, infra Part I.C., the structured settlementcompany assumes the defendant’s liability through novation, and purchases an annu-ity to make periodic payments to the claimant from a life insurance company. Thus,the structured settlement company can also be referred to as an assignee, having beenassigned liability from the defendant. This Article will refer to such a company as a“structured settlement company.”

44. Risk, Structured Settlements, supra note 19, at 890. R45. Robert W. Wood, Single-Claimant Qualified (468B) Settlement Funds?, TAX

NOTES, Jan. 5, 2009, at 71, 73 [hereinafter Wood, TAX NOTES] (noting that the com-mission will be paid for by the life insurance company); 1999 Hearing, supra note 15, Rat 19 (1999) (written statement of John E. Chapoton, Partner, Vinson & Elkins,L.L.P., on behalf of the National Association of Settlement Purchasers). The standardcommission is 4%. E-mail from Patrick J. Hindert, Managing Director, S2KM Ltd. toJeremy Babener, J.D. Candidate, Class of 2010, New York University School of Law(Sept. 4, 2009, 12:00:15 EDT) (on file with author) [hereinafter Hindert E-mail, Sept.4, 2009]. However, multiple agents frequently share the 4%, thus reducing any indi-vidual agent’s take. Id. One commentator notes that such commission sharing cancreate a conflict of interest, sometimes not disclosed to the structured settlement recip-ient. Id.

46. Scales, supra note 2, at 902. R47. See Settlement Funding, LLC v. Jamestown Life Ins. Co., 78 F. Supp. 2d 1349,

1364 (N.D. Ga. 1999) (noting that the court was “not convinced that there exists apublic policy against the assignability of structured payments to protect the recipientsof the payments ‘from squandering their benefits’”). But see C.U. Annuity ServiceCorp. v. Scott Young, 722 N.Y.S.2d 236 (N.Y. App. Div. 2001); Green v. Safeco LifeIns., 727 N.E.2d 393 (Ill. App. Ct. 2000); Liberty Life Assur. Co. of Boston v. StoneStreet Capital, Inc., 93 F. Supp. 2d 630 (D. Md. 2000); Singer Asset Finance Co. v.Bachus, 741 N.Y.S.2d 618 (N.Y. App. Div. 2002).

48. Settlement Funding, LLC, 78 F. Supp. 2d at 1364.



ture structured settlement payments, is a common transaction that willbe discussed later in Part III. Factoring transactions, and legislativedecisions regarding them, have done much to erode the tax doctrinesdiscussed in this Article, as applied to structured settlements.

C. A Tax Subsidy at Work

Structured settlements for personal injury claims are made be-tween parties as an alternative to a lump-sum payment.49 Rather thana defendant writing plaintiff a check for $1 million, for example, thedefendant could agree to pay plaintiff $2 million in installments on asemi-annual or monthly basis over a period of years. Because the de-fendant possesses the bulk of the amount for those years, and can in-vest it, more money can be paid out later on. Business defendantsincapable of making an immediate high-value payment are also able tokeep their doors open by delaying payment. Thus, the configurationof a structured settlement is inherently attractive to certain parties, incertain situations.50

However, the tax treatment of the structured settlement rendersthe arrangement even more attractive, and to both sides.51 It is saidthat the $6 billion market for structured settlement annuities “owes itsexistence almost entirely”52 to what the Joint Committee on Taxationcalls a “tax subsidy.” 53 The tax subsidy does this by extending theTax Code’s favored treatment of lump-sum awards and settlements forphysical injuries to periodic payments. It has long been true that

49. Other alternatives, like trusts, exist. See generally Luther, supra note 42. R50. NSSTA can produce countless supporters of the tax subsidy, National Struc-

tured Settlements Trade Association, Independent Voices, http://www.nssta.com/i4a/pages/index.cfm?pageid=3291 (last visited Feb. 2, 2009), and many articles have beenwritten listing the advantages. E.g., Dirk Yandell, Advantages and Disadvantages ofStructured Settlements, 5 J. LEGAL ECON. 71 (1995).

51. Goldberg & Mauro, supra note 1, at 68; A Roundtable, supra note 10, at 70 R(comments of Lawrence Charfoos).

52. Scales, supra note 2, at 895 (citing A Roundtable, supra note 10, at 72 (com- Rments of Charles Krause); 1999 Hearing, supra note 15, at 32–33 (Statement of RTimothy J. Trankina, Peachtree Settlement Funding)).

53. JOINT COMM. ON TAXATION, 106th CONG., TAX TREATMENT OF STRUCTURED

SETTLEMENT ARRANGEMENTS (Comm. Print 1999); see Meligan Interview, supra note31 (stating that many fewer structured settlements would occur without the tax ex- Remption); Telephone Interview with Randy Dyer, Former Executive Vice President,NSSTA (Feb. 18, 2009) [hereinafter Dyer Interview] (stating that without the tax ex-emption, structured settlements would be much less common). But see McCulloch E-mail, supra note 17 (arguing that the long term security and flexibility of structured Rsettlements are stronger reasons for a plaintiff to structure than the tax benefit); UlmanE-mail, Feb. 16, 2009, supra note 39 (noting that additional benefits such as protec- Rtion against creditor claims and mortality risk might sometimes be more important toclaimants).



plaintiffs do not include physical injury awards or settlement moniesin gross income for purposes of taxation.54 Once the plaintiff receivesthose monies and invests them, however, the gain derived is not ex-empted from taxation.55

However, IRS revenue rulings in the late 1970s, and Congress’senactment of the Periodic Payment Settlement Tax Act of 1982, ap-proved a tax exemption that would allow personal injury money to beinvested without incurring taxable earnings. In the 1982 Act, Con-gress amended section 104(a)(2) of the Tax Code to exclude personalphysical injury and sickness damages “whether as lump-sums or asperiodic payments.”56 Thus, plaintiffs could receive damages in in-stallment payments, without losing the beneficial tax-exempt status ofaward or settlement monies.57

At the same time, Congress also established section 130, whichoperated on the defense side corresponding to section 104(a)(2)’samendment affecting the plaintiff side. Section 130 exempts income

54. T.D. 2747, 20 Treas. Dec. Int. Rev. 457 (1918).55. See Rev. Rul. 79-313, 1979-2 C.B. 75 (citing Rev. Rul. 65-29, 1965-1 C.B. 59);

Andrada, supra note 36, at 470 (citing Kovacs v. Comm’r, 100 T.C. 124 (1993), aff’d Rper curiam, 25 F.3d 1048 (6th Cir. 1994), cert. denied, 513 U.S. 963 (1994));Goldberg & Mauro, supra note 1, at 38; Lawrence A. Frolik, The Convergence of RI.R.C. § 104(a)(2), Norfolk & Western Railway Co. v. Liepelt and Structured Settle-ments: Tax Policy ‘Derailed’, 51 FORDHAM L. REV. 565, 566 (1983). But see I.R.C.§ 103 (2006) (exempting interest on state and local bonds from gross income). Earn-ings on the award or settlement are taxed regardless of whether the parties calculatedthe lump-sum value based upon future investment. Frolik, supra, at 575.

56. I.R.C. § 104(a)(2) (2006) (emphasis added) (excluding “the amount of anydamages (other than punitive damages) received (whether by suit or agreement andwhether as lump sums or as periodic payments) on account of personal physical inju-ries or physical sickness”). Treasury regulations define “damages received whetherby suit or agreement” to include amounts received, except for workmen’s compensa-tion, “through prosecution of a legal suit or action based upon tort or tort type rights,or through a settlement agreement entered into in lieu of such prosecution.” Treas.Reg. § 1.104-1(c) (as amended in 1970). Considerable literature is dedicated to dif-ferentiating those types of injury payments that do and do not constitute physicalinjuries or physical sickness. E.g., Henry E. Smith, Symposium, Liability for Incho-ate and Future Loss, 88 Va. L. Rev. 1953 (2002).

57. The exemption for these payments continues even upon plaintiff’s death.Goldberg & Mauro, supra note 1, at 38 (citing Rev. Rul. 79-220, 1979-2 C.B. 74). RStates also hold lump sums and periodic payments to be tax exempt. National Struc-tured Settlements Association, Structured Settlements: Financial Protection DuringEconomic Crisis, Jan. 23, 2009, http://www.nssta.com/files/public/FINANCIAL_SE-CURITY_HAND-OUT_10-08.pdf. The exclusion affects state income taxes as wellas federal. Many states use the federal definition of taxable income for their taxablebase. E.g., CAL. REV. & TAX CODE § 17071 (West 2009). At least one state explic-itly excludes compensation for personal injuries and sickness. Some states continueto exclude non-physical injuries and sickness. N.J. STAT. ANN. § 54A:6-6 (West2009).



paid by defendants to structured settlement companies for taking ondefendants’ liability to make future payments to plaintiff through a“qualified assignment.”58 The income is exempt from tax “to the ex-tent that such amount does not exceed the aggregate cost of any quali-fied funding assets,”59 those assets being the annuity purchased tofund plaintiff’s future payments.

Thus, a transfer of liability would follow these steps. First a de-fendant might pay $100,000 to a structured settlement company inconsideration for the company assuming liability for plaintiff’s futurepayments. The company pockets $3,000 as a fee, and purchases a$97,000 annuity. Because of section 130, the structured settlementcompany need only pay income tax on the $3,000 fee.60

The benefit to the defendant can be seen in the subsequent step.Defendant businesses can deduct personal injury damages paid as abusiness expense.61 Thus, the lump-sum payment defendant makes toa structured settlement company will be immediately deductible.62

That sum acts as an investment principal, which produces earningsover the future payout period. Neither the defendant, nor the struc-tured settlement company, nor the plaintiff, will ever pay taxes onthose earnings.63 In this way, section 104(a)(2) and section 130 com-bine to create an incredibly beneficial settlement arrangement option

58. See I.R.C. § 130(a) (2006). A qualified assignment is defined as “any assign-ment of a liability to make periodic payments as damages . . . [where] such periodicpayments are fixed and determinable as to amount and time of payment . . . [and]cannot be accelerated, deferred, increased, or decreased by the recipient of such pay-ments.” I.R.C. § 130(c) (2006).

59. See I.R.C. § 130(a) (2006). A qualified funding asset has many requirements,including three particularly substantive ones. First, the investment must be an “annu-ity contract issued by a . . . licensed . . . insurance company . . . or any obligation ofthe United States.” I.R.C. § 130(d) (2006). Second, the timing and amounts of peri-odic payments must be “reasonably related,” to the timing and amounts of paymentsowed to the plaintiff. Id.; Andrada, supra note 36, at 483 (citing I.R.C. § 130(d)). RAnd third, the annuity must be purchased within sixty days of the qualified assign-ment. I.R.C. § 130(d)(4) (2006).

60. See Andrada, supra note 36. See generally I.R.C. § 130 (2006). R61. See Joseph W. Blackburn, Taxation of Personal Injury Damages: Recommen-

dations for Reform, 56 TENN. L. REV. 661, 687 (1989) (citing I.R.C. § 165(a) (1986));I.R.C. § 162 (2006 & Supp. II 2008).

62. See Andrada, supra note 36, at 482, n.59, 483. The defendant can only deduct Rthe present value of the future stream of income, and not the entire expected output.In Ford Motor Co. v. Comm’r, Ford argued that a deduction of the full nominal valueof expected output from twenty structured settlements was proper. Ford Motor Co. v.Comm’r, 102 T.C. 87, 90 (1994). This would have amounted to a nearly $24.5 mil-lion deduction. Id. However, the Tax Court ruled in favor of the commissioner, al-lowing only the deduction of cost of the annuities purchased. See id. at 104–05. TheSixth Circuit affirmed. Ford Motor Co. v. Comm’r, 71 F.3d 209 (6th Cir. 1995).

63. See Andrada, supra note 36, at 482. R



from an income tax perspective. Together, they allow a smaller, im-mediately deductible payment from defendant, to create a larger pay-out for plaintiff.64

Defendant could of course pay the periodic payments to theplaintiff itself, taking an ordinary business deduction for each pay-ment. However, in doing so, plaintiff would remain a mere generalcreditor.65 Unfortunately, if defendant becomes insolvent under theseconditions, plaintiff would be forced to stand in line with other credi-tors.66 Section 130 changes that by encouraging defendants to pay theprincipal amount to an insurance company, hopefully a responsibleone.67 Thereafter, defendant’s financial position is of no concern toplaintiff. Moreover, changes to the Tax Code in 1988 allow for struc-tured settlement payees to have rights beyond those of a generalcreditor.68

Of course, there is another, perhaps more significant benefit todefendants. Defendants and their liability insurers can save anywherebetween 10% and 30% by using a structured settlement.69 This willbe discussed in Part III.

Perhaps the simplest way to quantify the value of the tax exemp-tion70 is to compare the rate-of-return that a lump-sum investmentwould have to obtain, before taxation, in order to result in the same

64. See id.; JOINT COMM. ON TAXATION, 106th CONG., TAX TREATMENT OF STRUC-

TURED SETTLEMENT ARRANGEMENTS (Comm. Print 1999).65. Risk, Structured Settlements, supra note 19, at 875. R66. Id.67. Some have also observed that life insurance companies benefit from the tax

treatment. 1999 Hearing, supra note 15, at 28 (Statement of Timothy J. Trankina, RFounder and CEO of Peachtree Settlement Funding) (“[A] Life Insurance Companygets to sell their annuity policies at very competitive rates. In turn, they put thatmoney to work on investments earning large returns for themselves which far exceedthe rate at which the annuities were placed. . . . It is not difficult to see the largeprofits the Life Insurance Companies enjoy . . . .”); Rudnitsky & Blyskal, supra note9, at 29 (“Life Insurance Co. of North America isn’t hurting either. Its payments Rguarantee an 8% return, but with long-term Treasury bonds now selling for 12%,LINA can actually do far better.”).

68. Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647,§ 6079(b)(1)(B), 102 Stat. 3342, 3709–10 (1988).

69. Scales, supra note 2, at 880; see 1999 Hearing, supra note 15, at 28 (Statement Rof Timothy J. Trankina, Founder and CEO of Peachtree Settlement Funding) (report-ing savings of 15% to 20%); Neff E-mail, Feb. 23, 2009, supra note 32 (reporting a Rgenerally used estimate of 20% as a value of the tax subsidy).

70. At this point, we assume that defendant pays the same amount to the structuredsettlement company as it would to the plaintiff in a lump-sum settlement. We do so inorder to quantify the entirety of the benefit. However, the benefit is likely shared byboth parties. See infra Part IV.



after-tax rate-of-return of a structured settlement annuity.71 As seen inthe table below, a lump-sum settlement recipient in the 28% incometax bracket would have to invest at a 6.94% rate-of-return72 in order toobtain the earnings that a structured settlement recipient would obtainby using an annuity with a rate-of-return of only 5%.73

TABLE 1: COMPARISON OF LUMP-SUM INVESTMENT RATE-OF-RETURN WITH AFTER-TAX RATE OF RETURN FOR

STRUCTURED SETTLEMENT ANNUITY74

Structured 15% Tax 28% Tax 33% Tax 35% TaxSettlement Bracket Bracket Bracket Bracket

Internal Rateof Return

5.00% 5.88% 6.94% 7.46% 7.69%

6.00% 7.06% 8.33% 8.96% 9.23%

7.00% 8.24% 9.72% 10.45% 10.77%

8.00% 9.41% 11.11% 11.94% 12.31%

71. Were a lump-sum to be invested as an annuity, the earnings would be taxedpursuant to section 72. I.R.C. § 72 (2006) (“[G]ross income includes any amountreceived as an annuity.”). The earnings would be taxed according to the tax bracketof the taxpayer. I.R.S. Priv. Ltr. Rul. 2005-37-043 (June 23, 2005) (“Under section 72of the Internal Revenue Code, any amount received under an annuity contract is taxa-ble as ordinary income except to the extent it represents a return of your previouslytaxed investment in the contract.”); I.R.S. Priv. Ltr. Rul. 2000-30-013 (July 28, 2000)(“In general, section 72 provides that distributions under an annuity contract will betaxed as ordinary income, subject only to reducing the taxable portion of the paymentsby an amount attributable to the annuitant’s investment in the contract.”).

72. This assumes that the investment is taxed at the ordinary income tax rate, whichwould be the case if the taxpayer invested in an annuity. See supra note 71. The table Rprovided is based on investments in a bank’s certificate of deposit, or CD. MATT

GARRETSON & GUY KORNBLUB, NEGOTIATING AND SETTLING TORT CASES § 18:7(2009). NSSTA provides a comparison where $100,000 structured settlement and$100,000 lump-sum investment produce similarly scheduled payments. Assume afederal income tax rate of 27%, a state income tax rate of 5%, an equal growth interestrate of 6%, and that the structured settlement pays out $500 per month for livingexpenses over twenty years. Under that scenario, NSSTA projects that the structuredsettlement will payout approximately $214,000, while the lump-sum will only netapproximately $160,000. National Structured Settlements Trade Association, TaxablePortfolio vs. Tax-Free Structured Settlement, http://www.nssta.com/i4a/pages/index.cfm?pageid=3501 (last visited Jan. 20, 2009).

73. GARRETSON & KORNBLUB, supra note 72, § 18:7. The then president-elect for Rthe trade association in Austin, Texas said that a structured settlement with a 6 or 7%rate-of-return for someone in the 40% tax bracket equates to the same earnings as ataxed rate-of-return at 11%. A Roundtable, supra note 10, at 79 (comments of Herb RCumming); Amy J. Conner, Structured Settlements: The Basics, LAWYERS WEEKLY

USA, Aug. 6, 2001, at 2, available at http://www.jmwsettlements.com/structured_settlements/Article%20Reprints/LawyersWeeklyGrillo080601.pdf.

74. GARRETSON & KORNBLUB, supra note 72, § 18:7; 4Structures.com, Taxable REquivalent Yield Chart, http://www.4structures.com/4structures/front/resources/tem-



Even those in the 15% tax bracket can earn an additional 1%interest on investments. Over a period of many years, that amounts toa substantial increase in total wealth. Of course, the exemption ismore valuable for those with higher tax rates.75 However, those in theindustry believe that the majority of claimants are net taxpayers.76

Thus, it can benefit most claimants.

II.STRUCTURED SETTLEMENTS: BIRTH, SUBSIDY,

JUSTIFICATION, AND DOCTRINE

Many point to 1968 as the first year of structured settlements.77

Not until the late 1970s and early 1980s did the method begin to growat exponential rates.78 The increasing use of structured settlements,rather than lump-sum payments, has been called “one of the moststriking developments in the tort payment structure.”79

plate/resources_tools_taxable-equivalent-yield-structured-settlement.jsp (last visitedApr. 13, 2009) (providing the same statistics as the Garretson treatise, and more).One NSSTA attorney agrees that the table illustrates the increase in value that one canobtain through the tax subsidy. E-mail from Craig H. Ulman, Counsel to NSSTA toJeremy Babener, J.D. Candidate, Class of 2010, New York University School of Law(Apr. 14, 2009 11:44:22 EDT) (on file with author). However, he correctly observesthat the table compares a structured settlement annuity’s performance with that of aCD, which cannot produce the same type of scheduled payments. Id. (noting that forthis reason the comparison may be “poor”). Of course, the return rates listed may besomewhat high for the current economic climate.

75. See Rudnitsky & Blyskal, supra note 9, at 29 (quoting attorney Fred Levin) R(describing how the exemption would prevent a 70% income tax rate from transform-ing 15% interest earnings on an invested lump-sum into 4.5%).

76. Neff E-mail, Feb. 23, 2009, supra note 32. Contra E-mail from Joseph Tombs, RPartner, Amicus Financial Advisors LLP to Jeremy Babener, J.D. Candidate, Class of2010, New York University School of Law (June 10, 2009, 8:57:37 EST) (on file withauthor) (estimating that 30% of structured settlement recipients actually receive a sig-nificant reduction in their future income taxes). One commentator questions suchstatistics: “Where is the objective proof? Many structured settlement industry ‘beliefs’don’t square with the facts.” Hindert E-mail, Sept. 4, 2009, supra note 45 (citing RBabener, supra note 2). R

77. See Brian Brown & Lisa Chalidze, Structured Settlements: An Overview, 22VT. B.J. & L. DIG. 14, 14 (1996); Thomas C. Downs, Superfund Colloquium: Peri-odic Payment of Claims: New Hope for CERCLA Settlements?, 8 TUL. ENVTL. L.J.387, 402 (1995) (citing Panel Discussion, Annuities to Settle Cases, 42 INS. COUNS. J.367, 370–77 (1975)). But see Riccardi & Ireland, supra note 15, at 7 (suggesting that Rit was only in 1968 that they became “widely used”); Brown & Chalidze, supra, at 14(suggesting that the structured settlements were merely “given a boost” by theThalidomide cases).

78. See infra Part II.A.79. Ellen S. Pryor, Symposium, Liability for Inchoate and Future Loss, 88 VA. L.

REV. 1757, 1763 (2002).



This section narrates the beginnings of structured settlements,their initial tax treatment by the IRS, and the subsequent legislationcodifying and expanding their favorable treatment. In doing so, thesection takes note of the initial belief that the doctrines of constructivereceipt80 and economic applied benefit.81 These doctrines demandthat structured settlement recipients, in order to take advantage of thebeneficial tax treatment, not obtain control over the annuities pur-chased to fund their payments. The importance assigned to these doc-trines corresponds with the legislation’s presumed, and later declaredjustification to discourage personal injury claimants from quickly dis-sipating awards or settlement monies within their control.

Part III will then detail the eventual deconstruction of these twodoctrines as applied to structured settlements.

80. Tax regulations supply a definition of constructive receipt:Income although not actually reduced to a taxpayer’s possession is con-structively received by him in the taxable year during which it is creditedto his account, set apart for him, or otherwise made available so that hemay draw upon it at any time, or so that he could have drawn upon itduring the taxable year if notice of intention to withdraw had been given.However, income is not constructively received if the taxpayer’s controlof its receipt is subject to substantial limitations or restrictions.

Treas. Reg. § 1.451-2(a) (as amended in 1979) (emphasis added).81. In Sproull v. Commissioner, the Tax Court found that despite an employee’s

non-involvement in the creation of a trust that deferred payments from the employerto a later date, the question was only whether “any economic or financial benefit[was] conferred on the employee as compensation.” Sproull v. Comm’r, 16 T.C. 244,247 (1951), aff’d, 194 F.2d 541 (6th Cir. 1952) (citing McEwen v. Comm’r, 6 T.C.1018 (1947)). The court found that the fund was

ascertained and paid for by petitioner’s employer for his benefit in thatyear. Petitioner had to do nothing further to earn it or establish his rightstherein. . . . No one else had any interest in or control over the monies.The trust agreement contained no restriction whatever on petitioner’sright to assign or otherwise dispose of the interest thus created in him.

Id. at 248. Thus, the transfer of funds into the trust was held to be taxable income ofthe employee. Id. at 247–48. Several court’s since have used the Sproull approach.A later Tax Court defined the doctrine: “Under the economic-benefit theory, an indi-vidual on the cash receipts and disbursements method of accounting is currently taxa-ble on the economic and financial benefit derived from the absolute right to income inthe form of a fund which has been irrevocably set aside for him in trust and is beyondthe reach of the payor’s debtors.” Pulsifier v. Comm’r, 64 T.C. 245, 246 (1975) (cit-ing Sproull, 16 T.C. at 247–48). In 1993, the economic benefit doctrine was appliedin a technical advice memo to hold, “a service recipient’s creation of a fund in whicha service provider has vested rights will result in immediate inclusion of the amountfunded in the service provider’s gross income.” I.R.S. Priv. Ltr. Rul. 93-36-001 (May12, 1993). Some commentators, however, have argued that the economic benefit doc-trine has been eroded through misapplication. See Gordon T. Butler, Economic Bene-fit: Formulating a Workable Theory of Income Recognition, 27 SETON HALL L. REV.70, 103, 115 (1996).



A. The Birth and Growth of Structured Settlements

Though commentators have yet to determine who coined the term“structured settlements,” many point to a set of Canadian Thalidomidecases,82 against the drug manufacturer Richardson-Merrill.83 Plain-tiffs argued that the company’s sleeping pill caused severe and perma-nent physical handicaps in the children of women who used it duringpregnancy.84 To settle the case, defendant agreed to make periodicpayments to plaintiffs.85 The subsequent rise of structured settlementsin the next decade has been attributed to different triggers. Amongthem, some point to the increase in personal injury cases,86 specifi-cally “mass personal injury” cases.87 As will be seen, the tax treat-ment was probably the largest factor.

As of 1976, the structured settlement market was worth approxi-mately $5 million.88 This quickly changed with IRS rulings in 1979and congressional action in 1982,89 discussed in Part I.B–C. Over thenext quarter century, the structured settlement market grew rapidly.

82. See Brown & Chalidze, supra note 77, at 14 (“Structured settlements as a Rmeans of resolving lawsuits date back to the 1960s, and were given a boost by themassive litigation triggered by the drug thalidomide . . . .”).

83. Kenneth K. Keene & Robert J. Ross, Structured Settlements, BUS. INS., Apr. 28,1980, at 25; Downs, supra note 41, at 402–04 (citing Panel Discussion, Annuities to RSettle Cases, 42 INS. COUNS. J. 367, 370–77 (1975)).

84. Downs, supra note 41, at 402 (citing Panel Discussion, Annuities to Settle RCases, 42 INS. COUNS. J. 367, 370–77 (1975).

85. See Brown & Chalidze, supra note 77, at 14. R86. REPORT ON PERIODIC PAYMENT OF DAMAGE FOR PERSONAL INJURY AND DEATH,

MANITOBA LAW COMMISSION 39 (1987).87. Andrada, supra note 36, at 467 (citing Brown & Chalidze, supra note 77, at R

14).88. Riccardi & Ireland, supra note 15, at 8. R89. See Rev. Rul. 79-220, 1979-2 C.B. 74; Rev. Rul. 79-313, 1979-2 C.B. 75; Peri-

odic Payment Settlement Tax Act of 1982, Pub. L. No. 97-473, § 101(a), 96 Stat.2605, 2605 (1983).



FIGURE 1: STRUCTURED SETTLEMENT ANNUITY SALES IN BILLIONS

OF DOLLARS90

From $5 million in 1976,91 and fewer than 3,000 cases in 1979,the market expanded to $1.5 billion in 1983, spread over 15,000cases.92 By the early 1990s, twenty life insurance companies wereselling structured settlement annuities,93 and the market had grown to$4 billion.94 In 1997, a large survey found that 12% of commercialliability physical injury claims settled by way of structured settle-

90. The data was provided by Structured Financial Associates, Inc. E-mail fromMelissa Evola, Vice President of Business Development, Structured Financial Associ-ates, Inc., to Jeremy Babener, J.D. Candidate, Class of 2010, New York UniversitySchool of Law (Feb. 27, 2009, 17:19:10 EST) (on file with author) [hereinafter EvolaE-mail]. Their data incorporates data through 2002 from a structured settlement trea-tise, DANIEL W. HINDERT ET AL., STRUCTURED SETTLEMENTS AND PERIODIC PAYMENT

JUDGMENTS § 1.03[1] (2009), and has been the treatise’s source thereafter. Evola E-mail, supra.

91. Riccardi & Ireland, supra note 15, at 8. R92. Phillip L. Kennerly, Structured Settlements: A Useful Tool for the Claims Judge

Advocate, 1986 ARMY L. 12, 12 n.3 (1986) (citing Denninger, Bellamy & Terue,Anatomy of a Structured Settlement, CASE & COMMENT, Feb. 1985, at 26). Otherestimates put the value at over $2 billion in 1982. Kennerly, supra, at 128 (quotingStaller, The Basics of Structured Settlements, PRAC. LAW., Jan. 15, 1984, at 75).Some attribute their popularity in the early 1980s, at least in part, to annuities’ thenimpressive double-digit rates-of-return. Risk, Structured Settlements, supra note 19, Rat 877.

93. Downs, supra note 41, at 403 n.83 (citing Structured Settlements; How to Make RSure You Don’t Lose in ‘Win-Win’ Deals, BUS. INS., Nov. 25, 1991, at 25).

94. Risk, Structured Settlements, supra note 19, at 878. R



ments.95 Nearly 25% of the claims in excess of $300,000 involvedstructured settlements.96 Based on the available statistics,97 the aver-age value of a structured settlement annuity premium is approximately$177,000.

In 2002, NSSTA reported $6.12 billion in annuity premium salesby its members.98 By 2004, NSSTA estimated that over $400 billionof structured settlement payouts had already been made to 500,000structured settlement recipients.99 An organization that has trackedthe growth of the industry reports that over 35,000 structured settle-ment annuities were sold in 2008,100 accounting for $6.2 billion.101

Some estimate that more than $100 billion of previously structuredsettlements currently exist.102

95. ISO SURVEY, supra note 13, at 22. R96. See id. Reportedly, a NSSTA survey found that 7% of settlements between

$75,000 and $100,000, and 30% of settlements over $1 million, use structured settle-ments. Hindert, supra note 16. R

97. See Hindert, supra note 16 (providing the estimated total number of structured Rsettlements, which can be used to calculate the average value of structured settlementswhen combined with the annual value of total structured settlement annuitypremiums).

98. Risk, A Case, supra note 7, at 644 n.13 (citing Press Release, Peter Arnold, RNSSTA, Structured Settlements Industry Maintains Surging Popularity in 2002 (Jan.30, 2003)); cf. Scales, supra note 2, at 882 n.72 (citing Press Release, National Struc- Rtured Settlements Trade Association, Structured Settlements Industry Reports 19 Per-cent Surge in Demand During 2001; $6.05B Is Best Year in History (Feb. 5, 2002)).

99. HINDERT ET AL., supra note 90, § 1.03[1] (citing Report of National Structured RSettlements Trade Association President Mal Deener to NSSTA Annual Meeting(May 1, 2004)).100. Evola E-mail, supra note 90. In 2001, 50,000 to 60,000 tort claims were settled Rusing structured settlements. Scales, supra note 2, at 882. It is unclear if that number Ris accurate, as the author has not found sources tracking the number of sales prior to2008. If the 50,000 to 60,000 number is accurate, there is a real question of why thenumber has decreased to 35,000 while the value of sales have increased.101. Evola E-mail, supra note 90. In the past, some have estimated the value to Rreach some $10 billion, 1999 Hearing, supra note 15, at 78 (written statement of J.G. RWentworth, a finance company that purchases and securitizes structured settlements),or even $12 billion. Riccardi & Ireland, supra note 15, at 8 (citing http:// Rwww.nssta.com). AIG sold the most structured settlement annuities, with nearly $1.5billion. Evola E-mail, supra note 90. After AIG comes Prudential, with $986 mil- Rlion, MetLife, with $857 million, Hartford, with $767 million, Aviva, with $504 mil-lion, John Hancock, with $489 million, New York Life, with $361 million, Allstate,with $280 million, Pacific, with $274 million, Liberty, with $240 million, and Syme-tra, with $14 million. Id. One treatise notes that the steady volume of structuredsettlements “indicates a mature market.” HINDERT ET AL., supra note 90, § 1.03[1]. R102. See, e.g., Daniel W. Hindert & Craig H. Ulman, Transfers of Structured Settle-ment Payment Rights: What Judges Should Know About Structured Settlement Protec-tion Acts, 44 JUDGES’ J. 19, 19 (2005).



It seems to be roundly agreed upon that “[t]he $6,000,000,000market for structured settlement annuities owes its existence almostentirely to the tax subsidy.”103

B. The Two Revenue Rulings that Changed Everything

The tax treatment of structured settlements was initially estab-lished in 1979.104 The IRS issued two revenue rulings interpretingsection 104(a)(2) in relation to structured settlements, Rev. Rul. 79-220,105 and Rev. Rul. 79-313.106 Each allowed the exclusion of peri-odic payments for personal injury settlements.107

Rev. Rul. 79-220 permitted a plaintiff to exclude from incomethe nominal value of periodic settlement payments when received,rather than their discounted present value at the time of the settle-ment.108 In deciding, the ruling took specific note of the fact that thesettlement did not give any rights to the plaintiff in the annuity pur-chased by defendant’s insurer.109 Ultimately, the plaintiff neither had“actual [n]or constructive receipt [n]or the economic benefit of thelump-sum amount that was invested to yield [the monthly settlementpayments].”110 The ruling likened the situation to that of an employerproviding deferred compensation.111 There as well, “the arrangement[is] merely a matter of convenience to the obligor and [does] not givethe recipient any right in the annuity itself.”112

Rev. Rul. 79-313 permitted a plaintiff to exclude from incomeannual payments made pursuant to a settlement agreement, regardlessof the fact that the payment amounts increased by a set percentageeach year.113 Of central importance was the fact that the taxpayer had“neither actual nor constructive receipt, nor the economic benefit ofthe present value of the damages.”114 Having received neither control

103. Scales, supra note 2, at 895 (citing A Roundtable, supra note 10, at 72 (com- Rments of Charles Krause); 1999 Hearing, supra note 15, at 24–25 (Statement of RTimothy J. Trankina, Chief Executive Officer, Peachtree Settlement Funding)); cf.Meligan Interview, supra note 31 (suggesting that fewer structured settlements would Roccur without the tax benefits).104. See Riccardi & Ireland, supra note 15, at 8. R105. See Rev. Rul. 79-220, 1979-2 C.B. 74.106. See Rev. Rul. 79-313, 1979-2 C.B. 75.107. See Rev. Rul. 79-220, 1979-2 C.B. 74; see Rev. Rul. 79-313, 1979-2 C.B. 75.108. See Rev. Rul. 79-220, 1979-2 C.B. 74.109. See id.110. Id. (emphasis added).111. See id. (citing Rev. Rul. 72-75, 1972-1 C.B. 127).112. Id. (citing Rev. Rul. 72-75, 1972-1 C.B. 127).113. See Rev. Rul. 79-313, 1979-2 C.B. 75.114. Id. (emphasis added).



nor guaranteed benefit of the future payments, a taxpayer need notinclude such monies in their taxable income. Thus, again we see theapplication and significance of the two doctrines.

C. Codification and More

Structured settlements increased in usage after 1979, as noted,but defendants purchasing annuities to make the periodic paymentswere only able to deduct those payments as business expenses as themoney was distributed to plaintiffs.115

In an attempt to alter this disadvantageous position, and thusmake structured settlements more attractive to casualty and liabilityinsurers, IBAR Inc. hired a lobbyist, David M. Higgins, a Los Angelestax attorney, to persuade Congress to enact legislation providing sucha deduction.116 Mr. Higgins worked with the IRS to draft such a law,as well as the Congressional Budget Office.117 The bill was intro-

115. See Risk, Structured Settlements, supra note 19, at 873–74. R116. Id. at 874. IBAR Settlement Co., Inc. was advised that even if the legislativeattempt failed, it would show that there had been a good faith effort to clarify theissue. E-mail from Stan Schultz, CEO, IBAR Settlement Co., Inc., to JeremyBabener, J.D. Candidate, Class of 2010, New York University School of Law (Apr.27, 2009, 21:05:01 EST) (on file with author) [hereinafter Schultz E-mail].117. Risk, Structured Settlements, supra note 19, at 874. IBAR first approached RCongressman Barry Goldwater, Jr. Schultz E-mail, supra note 116. However, Con- Rgressman Goldwater, Jr. was soon embroiled in a drug scandal. Id. See generallyHouse Drug Query Is Assailed, N.Y. TIMES, Nov. 19, 1983, at § 1. Thereafter, IBARhired the firm of Manett, Phelps, and Phillips, which provided former CongressmanJames Corman to lobby the “IBAR Bill.” Schultz E-mail, supra note 116. At the Rsame time, a group of structured settlement brokers attempted to secure a private letterruling on similar issues. Id. Though they were advised by the IRS to withdraw therequest, they did not. Id. Thereafter, an adverse private letter ruling was issued. Id.;see I.R.S. Priv. Ltr. Rul. 82-48-073 (Aug. 31, 1982). Interestingly, a private letterruling issued two years prior had already secured the substance of what the 1982ruling decided against, and what the subsequent legislation would soon codify. SeeI.R.S. Priv. Ltr. Rul. 80-38-044 (June 24, 1980) (finding a transfer of funds to a struc-tured settlement company equivalent to a loan transaction, and thus not taxable).Though there was no opposition to the original contents of the bill, its many unrelatedamendments prevented passage in its first form as the Periodic Payment SettlementAct of 1981. Schultz E-mail, supra note 116. In fact, it was referred to in Congress Ras “The Christmas Tree Bill,” an initially uncontroversial bill that attracted amend-ments because congressmen believed it would pass. Id. Before passing H.R. 5470 onOctober 1, 1982, 128 CONG. REC. S26,905 (1982) (statement of the Presiding Of-ficer), the Senate attached to it five “nongermane amendments.” 128 CONG. REC.H30,352 (1982) (statement of Rep. Rostenkowski) (noting amendments concerningthe Highway Trust Fund, the Hawaiian Prepaid Health Care Act, and tax-relatedamendments concerning foster care payments, Indian tribal governments, and incomein the Virgin Islands). Before submitting the bill to Conference, the House attached anon-germane amendment of its own. 128 CONG. REC. H30,352 (1982) (clarifyinggovernment responsibilities in regulating “multiemployer health trusts”). The Confer-ence report, agreed to by both houses soon after its release, 128 CONG. REC. H33,263



duced separately by several legislators.118

The Periodic Payment Settlement Tax Act of 1982 codified thetwo 1979 revenue rulings119 by amending section 104(a)(2), but wentfurther, creating section 130.120 Interestingly, Congress avoided pro-viding substantive justifications.121 Moreover, Congress repeated itsevasion when amending the law in 1988,122 1996,123 and 1997.124

The Periodic Payment Settlement Tax Act of 1982 codified whatthe previous revenue rulings provided, replacing section 104(a)(2)’spersonal injury exclusion language of “whether by suit or agreement”with “whether by suit or agreement and whether as lump sums or asperiodic payments.”125 Reports by the Senate Finance Committee andHouse Committee on Ways and Means cited the benefit to taxpayersof providing “statutory certainty,”126 even though parallel revenue rul-ings already existed. They also stated that the provision was “in-tended to codify, rather than change, present law . . . [and that]periodic payments as personal injury damages are still excludablefrom income only if the recipient taxpayer is not in constructive re-

(1982); 128 CONG. REC. S33,183 (1982), cut the House’s amendment and two of theSenate’s amendments, but generally agreed to the remaining three. See H.R. REP. NO.97-984, at 13–21 (1982) (Conf. Rep.); see also 128 CONG. REC. H33,263 (1982)(statement of Rep. Rostenkowski) (referring to the Senate amendments respecting In-dian tribal governments, the Hawaiian Prepaid Health Care Act, and the tax treatmentof particular foster care payments). After trimming and passage, President Reaganintended to veto the bill. See Schultz E-mail, supra note 116 (recalling that the Indian Rtribal governments amendment was of concern to the President). However, formerCongressman James Corman lobbied House Speaker Tip O’Neil, who successfullylobbied the President. Id. Thus, the “IBAR Bill” was signed into law. Id.118. H.R. 5470 was substantively identical to H.R. 4356, introduced by Congress-men Goldwater and Rousselot, and H.R. 5732, introduced by Congressman Holland.JOINT COMM. ON TAXATION, 97TH CONG., DESCRIPTION OF TAX BILLS (H.R. 4467,H.R. 4948, H.R. 5177, H.R. 5470, AND H.R. 5573 12 n.1 (Comm. Print 1982)). H.R.4356 and H.R. 5732, unlike H.R. 5470, would have taken effect earlier. Id.119. See Rev. Rul. 79-220, 1979-2 C.B. 74; Rev. Rul. 79-313, 1979-2 C.B. 75; seealso JOINT COMM. ON TAXATION, 97TH CONG., DESCRIPTION OF TAX BILLS (H.R.4467, H.R. 4948, H.R. 5177, H.R. 5470, AND H.R. 5573 12-13) (Comm. Print 1982).120. See generally Periodic Payment Settlement Tax Act of 1982, Pub. L. No. 97-473, 96 Stat. 2605.121. See id.; see also S. REP. NO. 97-646 (1982).122. See Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647,§ 6079, 102 Stat. 3709 (1988).123. See Small Business Job Protection Act of 1996, Pub. L. No. 104-188, § 1605,110 Stat. 1755, 1838 (1996); see also H.R. REP. NO. 104-586 (1996).124. See Taxpayer Relief Act of 1997, Pub. L. No. 105-34, § 962(a), 111 Stat. 788,891 (1997).125. Periodic Payment Settlement Tax Act of 1982, Pub. L. No. 97-473, § 101(a), 96Stat. 2605 (emphasis added).126. H.R. REP. NO. 97-832, at 4 (1982); S. REP. NO. 97-646, at 3 (1982).



ceipt of or does not have the current economic benefit of the sumrequired to produce the periodic payments.”127

In addition to the codification, the Act inserted section 130 intothe tax code, excluding from gross income amounts received by struc-tured settlement companies for accepting a qualified assignment.128

The addition was passed over certain objections by the Treasury129

and the life insurance industry.130

127. H.R. REP. NO. 97-832, at 4 (1982) (emphasis added); S. REP. NO. 97-646, at3–4 (1982) (emphasis added).128. See Periodic Payment Settlement Tax Act of 1982, Pub. L. No. 97-473,§ 101(b)(1), 96 Stat. 2605. See generally I.R.C. § 130 (2006). Fifteen years later, inresponse to lobbying by the National Structured Settlements Trade Association, seeRisk, Structured Settlements, supra note 19, at 886 (citing Letter from Legislation and RRegulations Committee, NSSTA, to NSSTA Member Companies (Apr. 1997)), theTaxpayer Relief Act of 1997 amended section 130, extending the exemption toworker’s compensation payments. Taxpayer Relief Act of 1997, Pub. L. No. 105-34,§ 962(a), 111 Stat. 788, 891 (1997).129. See Miscellaneous Tax Legislation: Hearings Before the Subcomm. on SelectRevenue Measures of the Comm. on Ways and Means, 97th Cong. 7 (1982) [hereinaf-ter 1982 Hearing] (statement of John E. Chapoton, Assistant Secretary for Tax Policy,Treasury Department) (objecting because “[o]ur reading is that it goes beyond ex-isting law”). Because structured settlement annuity earnings would neither be taxableto defendant or plaintiff, Treasury argued that “income slips through the system.” Id.at 7. In doing so, Treasury believed the bill to create “a substantial new benefit tothird parties that assume obligations to make periodic damage payments.” Id. at 14(written statement of John E. Chapoton). Having heard Treasury testimony, Commit-tee Chairman Pete Stark transitioned to the next witness: “I am sure the gentlemenwill now proceed to destroy the testimony of the Secretary of the Treasury. You mayproceed to do that in any manner you see fit.” Id. at 81 (statement of Pete Stark,Chairman of the Subcomm. on Select Revenue Measures of the H. Comm. on Waysand Means). IBAR Settlement Co., Inc. lobbyist later responded to the Treasury state-ments: “I think the Treasury has misread [this] bill . . . I am hopeful we can work outwith Treasury their objections because we certainly are not in here looking for any-thing special. We do not want any excess deductions and we do not want any ex-traordinary exclusions . . . .” Id. at 88–89 (written statement of David M. Higgins,Esq., Overton, Lyman, & Prince). Interestingly, no one pointed to the previouslydiscussed 1980 private letter ruling holding that monies transferred to a structuredsettlement company were excludable as the equivalent of a loan transaction. SeeI.R.S. Priv. Ltr. Rul. 80-38-044 (June 24, 1980). A contrary ruling in 1982 was alsonot discussed. See I.R.S. Priv. Ltr. Rul. 82-48-073 (Aug. 31, 1982).130. 1982 Hearing, supra note 129, at 113 (statement of the American Council of RLife Insurance) (“Specifically, we are troubled by the provision of the bill which al-lows such assignees an exclusion from income for amounts received and applied tosatisfy assumed damage obligations, yet does not in any way specify when, or how,the assignee must use the amounts received to fund the damage payments . . . . [W]ecan see no justification for giving free rein to entities not subject to the rigoroussolvency and reserve accounting standards applicable to insurers to provide suchstatements . . . . For these reasons, we urge that H.R. 5470 be withdrawn, at leastinsofar as it specifies the tax treatment to be given third party payors of structuredannuity damage amounts.”).



D. Extrapolating a Justification from the Legislative History

While the committee reports for the Periodic Payment SettlementTax Act of 1982 convey little about Congress’s preference betweenstructured settlements and lump-sum settlements, allowing for both,legislative history of the Act’s 1981 predecessor and the 1982 Act’scommittee hearing provide insight. Concern for the “SquanderingPlaintiff,”131 one who accepts a lump-sum and prematurely dissipatesit, was frequently cited. The justification fits well alongside the refer-ence to the constructive receipt and economic benefit doctrines, whichrequire that a claimant not control received settlement monies. Bypreventing such control, premature dissipation becomes difficult, ifnot impossible.

Prior to introducing the Periodic Payment Settlement Tax Act of1982,132 Senator Max Baucus133 introduced a very similar PeriodicPayment Settlement Act of 1981.134 Senator Baucus argued that thelump-sum settlement approach “has proven unsatisfactory . . . in manycases because it assumes that injured parties will wisely manage largesums of money so as to provide for their lifetime needs. In fact, manyof these successful litigants, particularly minors, have dissipated theirawards in a few years and are then without means of support.”135 Incontrast, he went on, structured settlements “provide plaintiffs with asteady income over a long period of time and insulate them from pres-sures to squander their awards.”136

One year later, in Committee hearings on the bill for the 1982Act, similar assertions of plaintiff irresponsibility were introduced byPatrick J. Hindert,137 the later author of a leading structured settlement

131. See Scales, supra note 2, at 869 (discussing this oft-cited argument). R132. See 144 CONG. REC. S11, at 499–01 (1998) (statement of Sen. Baucus).133. Max Baucus is currently Montana’s Senior U.S. Senator, and Chairman of theSenate Finance Committee. See Max Baucus Newsroom, http://baucus.senate.gov/?p=newsroom (last visited Feb. 1, 2009).134. See The Periodic Payment Settlement Act of 1981, S. 1934, 97th Cong. (2dSess. 1981).135. 127 CONG. REC. 30,462 (Dec. 10, 1981) (statement of Sen. Baucus) (introduc-ing the Periodic Payment Settlement Act of 1981).136. Id.137. See 1982 Hearing, supra note 129, at 82, 84 (statement of Patrick J. Hindert, RPresident of Benefit Designs, Inc., a consulting firm for personal injury case parties)(testifying that lump-sum plaintiffs “are frequently back on the public dole” due to thedissipation of their award, and that lump-sum recipients are “frequently ill-equippedpsychologically, physically or educationally to assume the investment and mortalityrisks associated with managing money to satisfy anticipated future financialrequirements”).



treatise,138 and David Higgins,139 the attorney hired by IBAR Settle-ment Co., Inc., to lobby Congress.140

The legislative history for the Periodic Payment Settlement TaxAct of 1982 suggests that the prematurely dissipating plaintiff was a,if not the primary, justification for the legislation. This was true eventhough structured settlement annuities are subject to risks of infla-tion141 and insurer failure.142 Senator Baucus, Mr. Hindert, and Mr.Higgins each suggested that the problem of lump-sum dissipation ex-

138. See generally HINDERT ET AL., supra note 90. R139. See 1982 Hearing, supra note 129, at 87 (written statement of David M. Hig- Rgins, Esq., Overton, Lyman, & Prince) (“The use of a periodic payment settlementassures the availability of future compensation for lost support and care as those costsare incurred. Plaintiffs receiving periodic payments truly are protected from their ownill-conceived actions and the advice of others. If a payment or several payments aredissipated, future compensation for future costs continues to be available . . . . Thepayment of a substantial lump sum often does not mitigate those economic losses inthe long run, even if the amounts are theoretically adequate, because few people arecapable of investing a large lump sum to assure security, liquidity, and an appropriaterate of return for their future needs. They often are ill-advised by friends, relatives,and even professional managers, and some are natural spend-thrifts in any event.”).140. Telephone Interview with Stan Schultz, CEO, IBAR Settlement Co., Inc. (Apr.8, 2009).141. An annuity requires a payee to bind oneself to set future periodic payments.Some have criticized such binding because the plaintiff risks the possibility that infla-tion will be higher than estimated. See, e.g., Riccardi & Ireland, supra note 15, at 12; Rsee also J. Thomas Romans & Frederick G. Floss, Structured Settlements and theInterest Rate Switch, 12 J. FORENSIC ECON. 57, 60 (1999); Yandell, supra note 50, at R73. If so, the value of the annuity payments decrease, and the annuity cannot beconverted into other investments. See Joseph Kelner & Robert S. Kelner, Trial Prac-tice, Variable Income Annuity Structured Settlements, N.Y.L.J., June 27, 2000. Ofcourse, the lack of future knowledge is a “two edged sword.” Riccardi & Ireland,supra note 15, at 12. If the rate of inflation is lower than projected, the annuity’s Rpayments will have greater value. And, in fact, one study found the internal rates ofstructured settlements to historically outperform Treasury bill rates 78.52% of thetime. See Romans & Floss, supra, at 64. It is unclear what occurs during the remain-ing 21.48% of the time. See id.

Some structured settlements do not account for inflation at all. See I.R.S. Priv.Ltr. Rul. 94-37-028 (Sept. 17, 1994) (ruling that inflation does not effect the struc-tured settlement tax exemption). This places claimants at far greater risk of increasesin inflation. Meligan Interview, supra note 31. One plaintiff-side structured settle- Rment planner recommends not indexing a structured settlement annuity to inflation forclients over forty years of age. Id. This is because an indexed annuity’s increasingnominal payments will often not reach the non-indexed payments of decreasing valuefor over twenty-five years, by which time a claimant will likely not have many yearsof payments left. Id.

One might ask why Congress allows claimants to risk the loss of their award orsettlement by betting on low inflation. Mandating the indexing of structured settle-ment annuities to inflation might be more in line with the original purpose of the taxsubsidy. On the other hand, the fear of the prematurely dissipating plaintiff mighthave been solely aimed at poor purchasing, not poor investing. This defense will berelevant in the next section as well.



isted, and required a solution. Interestingly, such rhetoric was not in-cluded in the committee reports.143

E. Congressional Justifications in Hindsight

Though the legislative history suggests that Congress’s purposewas to discourage plaintiff lump-sum dissipation, commentators andcourts had no congressionally adopted justifications to rely on.144

Thus, for nearly two decades they hypothesized. Some suggested thatperiodic payments are excluded simply because personal injury dam-ages are excluded,145 others that Congress believed structured settle-ments would prevent plaintiffs from later government dependence.146

In 1998 and 1999, however, in the midst of considering how todiscourage former plaintiffs from selling their structured settlementwithout court approval,147 the justification question was addressed,and largely answered.

142. One risk inherent to structured settlements is the possibility that the insurermaking the periodic payments will not be able to pay, though this has not yet oc-curred. See Riccardi & Ireland, supra note 15, at 11. Though the 2008 crisis has Rbrought fear and concern about bank security, structured settlements have several pro-tections for payees. National Structured Settlements Association, supra note 57. RSuch companies must maintain assets above a required reserve ratio, though manyreserve more. Id. State regulators retain authority to help move companies towardrestructuring in the event of financial insecurity. Id. And, state insurance guarantyassociations offer protection somewhat similar to the Federal Deposit Insurance Cor-poration, making some periodic payments possible if an insurance company stopsmaking payments. Id. However, there are significant limitations in each statepreventing insurance agents and brokers from publicly or privately using the existenceof guaranty corporations to encourage the use of annuities. See, e.g., N.Y. INS. LAW

§ 7718 (Consol. 2009). The National Organization of Life & Health Insurance Guar-anty Associations keeps a list of the various state statutes. NOLHGA, State Laws andProvisions Report, http://www.nolhga.com/factsandfigures/main.cfm/location/lawdetail/docid/18 (last visited Feb. 9, 2009). It is not clear if guaranty associationswill insure factoring companies against life insurance company failures. See BracyInterview, supra note 28. There has been recent movement toward specifically ex- Rcluding factoring companies from such protections. See id. Structured settlementplanners discuss the possibility of insurer failure with personal injury claimants, butthe de minimis risk makes it a very positive discussion. See Meligan Interview, supranote 31. R143. See H.R. REP. NO. 97-832 (1982); S. REP. NO. 97-646 (1982).144. It seems unlikely that “statutory certainty,” see H.R. REP. NO. 97-832, at 4(1982); S. REP. NO. 97-646, at 4 (1982), led to the bill’s passage. Inserting section130 was not a codification.145. Blackburn, supra note 61, at 685. R146. See, e.g., O’Connell, supra note 27; see also Mannix, supra note 27, at 62 (“In R1982, seeking to prevent accident victims from frittering away large sums intended toprovide for them over their lifetimes, Congress instituted tax breaks for those whoagreed to receive their money over a period of years.”).147. Cf. 1999 Hearing, supra note 15, at 6 (statement of Rep. Pete Stark); 144 RCONG. REC. S11,499-01 (1998) (statement of Sen. Baucus).



Industry representatives from both the structured settlement com-panies and structured settlement purchasing companies agreed that the1982 legislation was passed in response to the danger of prematurelump-sum dissipation.148 Several congressmen, including those in-volved in the passage of the original legislation, agreed.149 Lastly, indescribing the basis for what it called Congress’s “tax subsidy for theuse of structured settlement[s],”150 the Joint Committee on Taxationreport agreed.151

148. 1999 Hearing, supra note 15, at 20 (written statement of John E. Chapoton, RPartner, Vinson & Elkins, L.L.P, on behalf of the National Association of SettlementPurchasers) (“There is no question that one of the reasons motivating [the HouseWays and Means Committee on Oversight] to adopt the Periodic Payment SettlementAct of 1982 was that structured settlements are useful in protecting people who cannotprotect themselves.”); see id. at 37 (statement of Thomas W. Little, Former Presidentof National Structured Settlements Trade Association, on behalf of the NSSTA)(“Congress has adopted special tax rules to encourage and govern the use of struc-tured settlements in order to provide long-term financial security for injured victimsand their families.”).149. See id. at 5 (statement of Rep. Pete Stark) (“The stories of people who receivedlarge lump-sum settlements and squandered them were equally heart rending, someended up back on welfare if they were in fact disabled. It made great good sense then,and I think it makes great good sense now.”); id. at 6 (statement of Rep. E. ClayShaw, Jr.) (“Congress was concerned that injured victims would prematurely spend alump-sum recovery and eventually resort to the social safety net.”); 144 CONG. REC.S11,499–01 (1998) (statement of Sen. Baucus) (“[O]ur focus in enacting these taxrules in sections 104(a)(2) and 130 of the Internal Revenue Code was to encourageand govern the use of structured settlements in order to provide long-term financialsecurity to seriously-injured victims and their families and to insulate them from pres-sures to squander their awards.”).150. JOINT COMM. ON TAXATION, 106th CONG., TAX TREATMENT OF STRUCTURED

SETTLEMENT ARRANGEMENTS (Comm. Print 1999).151. Id. at 7 (“If a recipient chooses a lump sum settlement, there is a chance that theindividual may, by design or poor luck, mismanage his or her funds so that futuremedical expenses are not met. If the recipient exhausts his or her funds, the individualmay be in a position to receive medical care under Medicaid or in later years underMedicare. That is, the individual may be able to rely on Federally financed medicalcare in lieu of medical care that was intended to have been provided by the personalinjury award. Such a ‘moral hazard’ potential may justify a subsidy to encourage theuse of a structured settlement arrangement in lieu of a lump sum payment to therecipient, to reduce the probability that such individuals need to make future claims onthese government programs. Under the structured settlement arrangement, by contrastto the lump sum, it is argued that because the amount and period of the payments arefixed at the time of the settlement, the payments are more likely to be available in thefuture to cover anticipated medical expenses (assuming the payment stream is nottransferred by the recipient).”) (emphasis added). While the language “may justify”could be interpreted to indicate a lack of commitment by the Joint Committee, thereport strongly indicates agreement that the purpose of the subsidy is to preventdissipation.



Thus, after nearly two decades, Congress had finally clarified thejustification for the “tax subsidy” to structured settlement transactions,namely, the image of the squandering plaintiff.152

III.ALLOWING CONSTRUCTIVE RECEIPT AND

ECONOMIC BENEFIT

Though Congress’s actions and writings discussed thus far high-lighted the application of the constructive receipt and economic bene-fit doctrines to structured settlements, the late 1980s marked thebeginnings of a complete overhaul. This section narrates the decon-struction of both doctrines, as applied to structured settlements,through two stages. Congress first legislated a reduced application ofthe economic benefit doctrine in 1988. Then, in the early 1990s, anew and profitable transaction was discovered whereby a companypurchases a structured settlement recipient’s future payments, thusconferring the substance of constructive receipt. The IRS and Con-gress implicitly confirmed recipients’ ability to perform such atransfer.

The two changes substantively destroyed much of the construc-tive receipt and economic benefit doctrines as applied to structuredsettlements. On the surface, they seem to detract from Congress’s ini-tially presumed, now known justification for the structured settlementtax subsidy: the discouragement of personal injury claimants from pre-maturely dissipating lump-sums. However, though the changes trans-fer at least some control to the claimant, they leave the tax subsidy’seffect intact. As will be shown, they may even have bolstered thesubsidy’s effectiveness.

A. Congress’s U-Turn on Plaintiffs’ Need to AvoidEconomic Benefit

Though both revenue rulings and legislative history153 highlightthe importance of preventing plaintiffs from receiving the economicbenefit of a structured settlement, that limitation was substantiallyeroded in 1988.154

Originally, section 130 stipulated “the assignee does not provideto the recipient of such payments rights against the assignee which are

152. See Scales, supra note 2, at 869 (discussing this oft-cited argument). R153. See H.R. REP. NO. 97-832, at 4 (1982); S. REP. NO. 97-646, at 4 (1982); Rev.Rul. 79-220, 1979-2 C.B. 74; Rev. Rul. 79-313, 1979-2 C.B. 75.154. See Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647,§ 6079(b)(1)(A)–(B), 102 Stat. 3342.



greater than those of a general creditor.”155 Thus, a structured settle-ment recipient was merely a “general creditor”156 to a structured set-tlement company, a person to whom the company owed futurepayments. However, Congress changed the language in 1988 to state,“The determination . . . of when the recipient is treated as havingreceived any payment with respect to which there has been a qualifiedassignment shall be made without regard to any provision of such as-signment which grants the recipient rights as a creditor greater thanthose of a general creditor.”157 Thus, structured settlement plaintiffscan now obtain rights “greater than those of a general creditor.”158

The new language in the 1988 amendment has been read by theIRS to override the doctrine of economic benefit:

Generally, the setting aside of funds in trust for recipient confers aneconomic benefit and results in income to the recipient in the yearof setting aside the funds. See Sproull v. Commissioner, 16 T.C.244 (1951), aff’d per curiam, 194 F.2d 541 (6th Cir. 1952). How-ever, the 1988 amendment to section 130(c) of the Code was in-tended to allow assignments of periodic payment obligationswithout regard to whether the recipient has the current economicbenefit of the sum required to produce the periodic payments.159

The IRS has since held that a plaintiff can hold a security interest in abank trust created by defendant to fund plaintiff’s periodic paymentswithout violating sections 104(a)(2) or 130.160 Today, some insurancecompanies offer agreements providing these greater rights, whileothers do not.161

As an explanation for the 1988 amendment, the House Reportstated, “Recipients of periodic payments under structured settlementarrangements should not have their rights as creditors limited by pro-visions of tax law.”162 Thus, perhaps meaning to, or perhaps not,

155. Periodic Payment Settlement Tax Act of 1982, Pub. L. No. 97-473,§ 101(c)(2)(C), 96 Stat. 2605.156. Periodic Payment Settlement Tax Act of 1982, Pub. L. No. 97-473, § 101(a), 96Stat. 2605.157. Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647,§ 6079(b)(1)(B), 102 Stat. 3342.158. Id.159. I.R.S. Priv. Ltr. Rul. 97-03-038 (Jan. 1, 1997) (emphasis added).160. Id.; see also I.R.S. Priv. Ltr. Rul. 92-53-045 (Oct. 6, 1992) (holding that section130 allows a plaintiff to perfect a security interest in a structured settlement annuitycontract).161. E-mail from Betty Gregware, Sales Executive, John Hancock Life InsuranceCompany to Jeremy Babener, J.D. Candidate, Class of 2010, New York UniversitySchool of Law (Feb. 27, 2009, 12:47:07 EST) (on file with author).162. H.R. REP. NO. 100-795, at 541 (1988). See generally H.R. REP. NO. 100-1104,at 25 (1988) (Conf. Rep.).



Congress took a large step away from the economic benefit doctrine asit applies to structured settlements.

Commentators vary in their interpretation of the 1988 switch.One author simply finds the failure to apply the economic benefit doc-trine to periodic payments confusing, especially in light of contradic-tory application of the doctrine in analogous contexts.163 Anotherargues that the doctrines of constructive receipt and economic benefit,as applied to structured settlements, should be narrowly construed.164

At the very least, the 1988 amendment to section 130 allowed thepayee of a structured settlement rights that the 1982 House165 andSenate166 reports stated would render the received payments ineligiblefor the favored tax treatment, thus violating the traditional understand-ing of the economic benefit doctrine.

However, the 1988 legislation did not necessarily contraveneCongress’s purpose in creating the structured settlement tax subsidy.The new rights available under the amendment can only be accessedunder rare circumstances that, in fact, have never transpired.167 If an-ything, the amendment assists the tax subsidy, encouraging personalinjury claimants to engage in structured settlements by reducing thefear of losing one’s settlement monies due to a defendant’s bank-ruptcy. For purposes of this Article the important takeaway is thateven early on Congress showed a willingness to relax the doctrine ofeconomic benefit as applied to structured settlements.

B. Eroding Constructive Receipt Through Factoring

Though the 1988 amendment marked a departure from the origi-nal application of the economic benefit doctrine to structured settle-ments, a new transaction developed in the early 1990s that went evenfurther, violating the traditional understanding of the constructive re-ceipt doctrine.168 The transaction, known as structured settlement

163. Frolik, supra note 55, at 581–82 (citing Rev. Rul. 62-74, 1962-1 C.B. 68 (hold- Ring prize payments that would be paid out over two years to be taxable in the yearwon, despite the fact that the prize money had been deposited into an escrow accountprior to the contest); Pulsifier v. Comm’r, 64 T.C. 245, 245–47 (1975) (holding a cashprize taxable in the year won, though it would not be received by the minor winnersuntil the age of majority)). Frolik argues that it seems far more plausible to apply theeconomic benefit doctrine to structured settlements than prizes not immediately re-deemable, especially since structured settlement recipients often play a role in creatingthe terms and timing of the future payments. Frolik, supra note 55, at 581–582. R164. Risk, A Case, supra note 7, at 652. R165. See H.R. REP. NO. 97-832, at 4 (1982).166. See S. REP. NO. 97-646, at 4 (1982).167. Gregware Interview, supra note 17. R168. Scales, supra note 2, at 915. R



“factoring,” is the sale by a former claimant, now payee, of the right totheir structured settlement’s future stream of income169 in exchangefor a lump-sum payment.170 The payee’s received lump-sum hassince been held to fall under section 104(a)(2), just as if paid in lump-sum form by the original defendant.171 By offering a cash amount to astructured settlement recipient sufficiently below the present value ofthe future income stream, a factoring company172 can net a profit.Commentators have observed that plaintiffs’ newfound ability to con-vert their future structured settlement payments to present value at anytime “bespeak[s] ‘constructive receipt’ of those payments.”173 Thus,in the early 1990s, the creation of the factoring industry tread over

169. The factoring industry reports that the vast majority of factoring transactions arepartial purchases, performed by employed structured settlement owners long after theoriginal settlement. 1999 Hearing, supra note 15, at 19–20 (written statement of John RE. Chapoton, Partner, Vinson & Elkins, LLP, on behalf of the NASP) (noting that theaverage seller of a structured settlement had a household income of nearly $25,000).170. Scales, supra note 2, at 861 (also referring to factoring as “unstructuring”). RInsurance companies selling structured settlement annuities frequently place anti-as-signment clauses in their contracts. Gregory S. Crespi, Selling Structured Settlements:The Uncertain Effect of Anti-Assignment Clauses, 28 PEPP. L. REV. 787, 789 (2001).Anti-assignment clauses are typically not self-executing. Hindert E-mail, Sept. 4,2009, supra note 45. A relevant party must act to enforce the clause, though this has Rbecome rare since the insertion of section 5891 into the Tax Code. Id. An evolvingarea of law is the question of whether or not such clauses are effective. See generallyHINDERT ET AL., supra note 90, § 16.02[c]; Crespi, supra. However, some observe Rthat anti-assignment clauses are generally not enforced today. See Hindert & Ulman,supra note 102; see Patrick D. Dolan, Securitization of Life Settlements, Structured RSettlements and Lottery Awards, in NEW DEVELOPMENTS IN SECURITIZATION 2008961, 967 (2008) (“Although State Transfer Acts do not explicitly address the enforce-ability of anti-assignment clauses, the procedures make it much less likely that thetransfer will be attacked successfully.”). But see C.U. Annuity Service Corp. v.Young, 722 N.Y.S.2d 236, 236–37 (N.Y. App. Div. 2001) (“[T]he promisee did notmerely agree that he would refrain from making an assignment; he agreed he waspowerless to do so. Having surrendered his legal ability to assign, there was no basisupon which he or any assignee could assert that a purported sale could have any legaleffect.”); HINDERT ET AL., supra note 90, § 16.02[2] (“[I]n the vast majority of cases, Rthe courts have enforced anti-assignment provisions in structured settlement agree-ments.”). In 1999, it was reported that the insurance industry “routinely file[d] 40 and50 page briefs and objections to the transfers.” 1999 Hearing, supra note 15, at 24 R(statement of Timothy J. Trankina, Founder and CEO of Peachtree SettlementFunding).171. I.R.S. Priv. Ltr. Rul. 1999-36-030 (June 10, 1999).172. Though structured settlement recipients typically sell their future stream of in-come to factoring companies, they could also sell the stream to the original structuredsettlement company or life insurance company. See Settlement Capital Corp. v. BHGStructured Settlements, Inc., 319 F. Supp. 2d 729, 732 (N.D. Tex. 2004) (concerning atortious claim where a factoring company lost a purchase of periodic payments from astructured settlement recipient, who decided to transfer her future payments to theannuity-originating structured settlement company instead of the factoring company).173. Scales, supra note 2, at 915. R



Congress’s original understanding of section 104(a)(2)’s exclusionlimitations.

The factoring market began in the early 1990s.174 The Settle-ment Capital Corporation describes itself as the first factoring com-pany.175 Jim Lokey, the corporation’s founder, created the businessmodel after responding to a structured settlement recipient’s classifiedadvertisement in a local paper, offering to sell the right to future pay-ments.176 Soon, other companies entered the market, such as J.G.Wentworth, Peachtree Funding, and Singer Asset Finance.177 By1997, at least five major settlement purchasers and many small bro-kers joined the fray.178 By 2005, it was estimated that some $250million of structured settlement payments were purchased annually.179

J.G. Wentworth, the self-proclaimed “leading direct-to-consumer pur-chaser of illiquid insurance products issued by highly rated financialinstitutions in the United States,”180 reports purchasing structured set-tlements with aggregate payment streams of $728 million in both 2007and 2008.181 Since its inception, the company has completed over51,000 factoring transactions, with aggregate payment streams ofnearly $4 billion.182 Currently, it is estimated that approximately8,000 factoring transactions occur annually, with an average price of$45,000, amounting to $360 million.183 Based on the estimated value

174. Mannix, supra note 27, at 62; O’Connell, supra note 27. But see Settlement RCapital Corporation, Structured Settlement Factoring, http://www.setcap.com/struc-turedfactoring.aspx?pt=services&mCATEGORY_ID=84&SubCATEGORY_ID=84(last visited Feb. 19, 2010).175. Settlement Capital Corporation, supra note 174. R176. Scales, supra note 2, at 898 (citing Interview with Earl Nesbitt, Vice President Rand General Counsel, Settlement Capital Co., in Halladale, Fla. (Oct. 29, 2001)).177. Scales, supra note 2, at 900. To expand his business, Lokey encouraged struc- Rtured settlement insurers, consultants, and brokers to refer clients in need of upfrontcash to Settlement Capital Corp. Bracy Interview, supra note 28. In doing so, he Rtaught his soon-to-be competitors how to factor. Id.178. HINDERT ET AL., supra note 90, § 16.02[1] (citing Selling Structured Settlement RPayments, NSSTA Newsletter, 3 (Jan. 1998). Other companies, such as BerkshireHathaway Life Insurance Co., later entered the market. Mannix, supra note 27, at 62. RThough there used to be a great many brokers, they are now few and far between.Bracy Interview, supra note 28. Many of the factoring brokerage companies are now Rfactoring companies. Id.179. See HINDERT ET AL., supra note 90, § 16.02[2]. R180. Disclosure Statement: Prepetition Solicitation of Votes with Respect toPrepackaged Plan of Reorganization for JGW Holdco, LLC, J.G. Wentworth, LLCand J.G. Wentworth, Inc. 14 (2009) [hereinafter J.G. Wentworth DisclosureStatement].181. Id. at 15.182. Id.183. E-mail from Earl Nesbitt, Executive Director, NASP, Sept. 11, 2009 to JeremyBabener, J.D. Candidate, Class of 2010, New York University School of Law (on file



of all structured settlements, it is believed that between 5% and 8% ofall structured settlements are eventually factored.184

Today, a factoring transfer is typically complete three months af-ter a structured settlement recipient first makes contact with the factor-ing company.185 Some companies advertise that money can betransferred to recipients within three to six weeks, and even offer cashadvances within a few days.186 Factorers have represented that 88%of structured settlement purchases are “partial purchases,”187 such thatthe claimant only sells a portion of his or her future income stream,though J.G. Wentworth has stated that the average factoring customercompletes an average of more than two such transactions.188 Accord-ing to J.G. Wentworth’s189 Chief Marketing Officer, over 70% of sur-veyed structured settlement sellers owned their structured settlementfor over ten years before factoring.190

The factoring market has also fed into securities.191 In 1997, J.G.Wentworth sold over $140 million of structured settlement securities,paying as much as 7.8% interest per year.192 Since then, the companyhas completed nineteen securitizations totaling approximately $2.1billion.193 The practice has continued during the 2008 credit crisis,194

which has been both a boon and a drought to the factoring industry.195

The reduced availability of credit has driven up business costs, whilethe downturn has increased consumer demand.196

with author) [hereinafter Nesbitt E-mail, Sept. 11, 2009] (estimating lower numbersfor 2009).184. Id.185. Bracy Interview, supra note 28. R186. E.g., Seneca One, Getting Started, http://www.senecaone.com/structured-settlement-recipients/getting-started.aspx (last visited Mar. 17, 2009).187. 1999 Hearing, supra note 15, at 19 (written statement of John E. Chapoton, RPartner, Vinson & Elkins, L.L.P., on behalf of the National Association of SettlementPurchasers); Telephone Interview with Andrew Cravenho, CEO, Settlement QuotesLLC (Feb. 19, 2009) [hereinafter Cravenho Interview] (stating that structured settle-ment purchases are typically for most of the guaranteed portion of a structuredsettlement).188. J.G. Wentworth Disclosure Statement, supra note 180, at 15. R189. Bracy Interview, supra note 28 (indicating that J.G. Wentworth and Peachtree Rare, by far, the largest factoring companies in the industry).190. The #1 Reason, supra note 18 (citing Ken Murray, J.G. Wentworth’s Chief RMarketing Officer).191. Andrada, supra note 36, at 472 (citing O’Connell, supra note 27, at A8). R192. O’Connell, supra note 27, at A8. R193. J.G. Wentworth Disclosure Statement, supra note 180, at 23. R194. See J.G. Wentworth – 2, http://s2kmblog.typepad.com/rethinking_structured_set/2008/12/jg-wentworth-2.html (last visited Feb. 6, 2009).195. See generally J.G. Wentworth Disclosure Statement, supra note 180. R196. Bracy Interview, supra note 28; Cravenho Interview, supra note 187. R



C. The IRS Extends the Section 104(a)(2) Exclusion toFactoring Transactions

In 1999, the IRS formally eroded the constructive receipt doc-trine as applied to structured settlements. That year, the IRS held thesection 104(a)(2) tax exclusion to apply to monies received by struc-tured settlement recipients for selling their future payments.197

The IRS looked back to their earliest structured settlement rul-ing,198 noting that the periodic payments were excluded because “theindividual had a right to receive only the monthly payments and didnot have the actual or constructive receipt or the economic benefit ofthe lump-sum amount.”199 However, the 1999 ruling held a factoringcompany’s lump-sum payment to claimant to be of the same “charac-ter under §104(a)(2)”200 as the future payments that claimant wouldhave otherwise received, and therefore excludible.201

The 1999 ruling stands in stark contrast to the earlier 1979 ruling,as well as Congress’s statements in 1982: “the periodic payments aspersonal injury damages are still excludable from income only if therecipient taxpayer is not in constructive receipt of or does not have thecurrent economic benefit of the sum required to produce the periodicpayments.”202 The IRS’s treatment of the proceeds from the factoringtransaction portrays structured settlement payments as a secure andalienable asset. But if secure and alienable, it follows that a structuredsettlement constitutes a constructive receipt of the future stream ofincome.

197. See I.R.S. Priv. Ltr. Rul. 1999-36-030 (Sept. 10, 1999); see also Andrada,supra note 36, at 483–84. See generally I.R.S. Priv. Ltr. Rul. 96-39-016 (June 17, R1996) (holding a lottery winner’s ability to assign rights to future payments not toconstitute constructive receipt).198. See Rev. Rul. 79-220, 1979-2 C.B. 74.199. I.R.S. Priv. Ltr. Rul. 1999-36-030 (June 10, 1999) (emphasis added) (citingRev. Rul. 79-220, 1979-2 C.B. 74).200. Id.201. See id. (declining to decide whether the transaction affected the structured set-tlement company making the future payments under section 130); see also Andrada,supra note 36, at 487 (noting substantial disagreement regarding the application of Rsection 130 to this scenario prior to the enactment of 2001 legislation). CompareI.R.S. Priv. Ltr. Rul. 1999-36-030 (June 10, 1999) (citing Ennis v. Comm’r, 17 T.C.465 (1951)) (observing that transferred assets are taxable if they are “the equivalent ofcash . . . [being] commonly sold or given as a part of a purchase price) (emphasisadded), and Rev. Rul. 68-606, 1968-2 C.B. 42 (cited as a limiting case), with I.R.S.Priv. Ltr. Rul. 1999-36-030 (June 10, 1999) (explaining that the factoring transactionhad become common by 1999 and holding that the structured settlement “was notreadily saleable,” and thus not equivalent to cash).202. H.R. REP. NO. 97-832, at 4 (1982) (emphasis added); S. REP. NO. 97-646, at 4(1982) (emphasis added).



Of course, the IRS did not rule on the legality of the transaction,merely on the proceeds’ taxability. The legality of the transaction, orat least the implied legality, would be legislated just a few years later.

D. Federal and State Legislatures Pass Laws ImplicitlyApproving Factoring

Because of the uncertainty of factoring transactions’ impact onthe original structured settlement selling company, the insurance in-dustry lobbied against structured settlement purchasing.203 In fact,NSSTA spent over $1.25 million on lobbying from 1998 through2001.204 On the other side,205 the factoring industry, through its polit-ical persona of NASP206 lobbied to oppose restrictions on settlementpurchasing.207 Naturally, the two sides criticized each otherpublicly.208

Those in Congress and at the Treasury viewed factoring as a con-travention of the structured settlement tax subsidy’s purpose.209 As a

203. Risk, Structured Settlements, supra note 19, at 883. R204. OpenSecrets.org, Annual Lobbying by National Structured Settlements TradeAssociation, http://www.opensecrets.org/lobby/clientsum.php?lname=Natl+Struc-tured+Settlements+Trade+Assn&year=2009 (last visited Nov. 14, 2009); see BracyInterview, supra note 28 (stating that the insurance industry “went to war with us, full Rout, no holds barred war—their purpose was to put us out of business” and indicatingthat the insurance industry sued factoring companies in state courts for interferingwith insurance company contracts, and lobbied state legislatures to outlaw factoringtransactions).205. See generally HINDERT ET AL., supra note 90, § 16.01[3] (“a federal and state Rlegislative contest ensued between those favoring and opposed to factoring structuredsettlements”).206. NASP is an acronym for the National Association of Settlement Purchasers.207. Risk, Structured Settlements, supra note 19, at 884; Dyer Interview, supra note R53 (“Both sides spent huge sums of money in an effort to overwhelm the other side.”). RBut see Bracy Interview, supra note 28 (“The view that [section 5891 and state struc- Rtured settlement protection acts] were designed to punish the factoring industry isridiculous. It was [the purchasing companies] who made the overwhelming effort toget them approved.”).208. Some of their criticisms will be referred to later in the Article, as they allegedlyprovide inside information.209. 1999 Hearing, supra note 15, at 6 (statement of Rep. E. Clay Shaw, Jr.) (“The Rintegrity of the entire system is being undone by factoring transactions . . . leaving[former plaintiffs] in the very predicament that structured settlements were set up toavoid.”); id. (written statement of Rep. Pete Stark) (stating that factoring “completelyfrustrates what our Committee intended when it adopted the original legislation toencourage structured settlements”); id. at 12 (written statement of Joseph M. Mikrut,Tax Legislative Counsel, Department of Treasury) (“These factoring transactions di-rectly undermine the policy objective underlying the structured settlement tax regime,that of protecting the long-term financial needs of injured persons. The factoringtransactions also effectively contravene the statutory requirement conditioningfavorable tax treatment to the various parties to the arrangement on the injured per-



legislative response to factoring, Senator Baucus recommended a pen-alty tax on factoring transactions except in court-approved cases in“instances of true hardship of the victim.”210 This legislation, pro-posed in 1998, would have set a very high standard of hardship.211

Under the proposal, a court or administrative body would have had tofind that “the extraordinary, unanticipated, and imminent needs of thestructured settlement recipient or the recipient’s spouse or dependsrender such a transfer appropriate.”212 Such language would likelyhave resulted in a severe decline in factoring transactions. Others rec-ommended more lenient standards of court approval,213 such as a bestinterests standard.214 Soon after, the insurance and factoring indus-tries agreed to a compromise,215 proposing a law imposing a 40% ex-cise tax on settlement purchase transactions without court approval.216

“Creatively attached”217 to the Victims of Terrorism Tax ReliefAct of 2001,218 Congress passed the proposed legislation. The Actcreated section 5891, providing an excise tax of 40% for factoring

son’s inability to accelerate such payments.”); 144 CONG. REC. S11,499-01 (1998)(statement of Sen. Baucus) (“I now find that all of this careful planning and long-termfinancial security for the victim and his or her family can be unraveled in an instant bya factoring company offering quick cash at a steep discount. . . . These structuredsettlement factoring transactions place the injured victim in the very predicament thatthe structured settlement was intended to avoid.”).210. 144 CONG. REC. S11,499-01 (1998) (statement of Sen. Baucus); Dyer Inter-view, supra note 53 (noting that NSSTA lobbied for a standard of financial hardship Rbefore 2000).211. See Structured Settlement Protection Act, H.R. 4314, 105th Cong. (2d Sess.)§ 5891(b)(2) (1998).212. Id.213. See Andrada, supra note 36, at 494. R214. 1999 Hearing, supra note 15, at 24 (Statement of Timothy J. Trankina, Founder Rand CEO of Peachtree Settlement Funding) (“The court should be asking, ‘what is inthe best interest of the claimant?’”).215. HINDERT ET AL., supra note 90, § 8A.03[1]. R216. Risk, Structured Settlements, supra note 19, at 884 (citing Letter from NSSTA Rto Hon. Bill Archer and Hon. William V. Roth, Jr., chairmen of U.S. House Ways andMeans Committee and Senate Finance Committee (Sept. 13, 2000)). While the fac-toring industry did not readily accept the court approval process, some thought that itwould also benefit factoring companies because the legislation and court approvalswould legitimize and secure each transaction. Bracy Interview, supra note 28. Inter- Restingly, though Republicans are typically found on the side of insurance companies,this was not so with respect to section 5891. Because of the Republican ethic ofeconomic liberalism, many Republican congressmen disliked the idea of requiringpayees to seek court approval for factoring transactions. In fact, though NASP even-tually agreed to the court approval process under the best interests standards, someRepublicans still disapproved. Id.217. Scales, supra note 2, at 918. R218. See Victims of Terrorism Tax Relief Act of 2001, Pub. L. No. 107-134, § 5891,115 Stat. 2436 (2002).



transactions not approved by a “qualified order,”219 to be made by anapplicable State Court or administrative authority finding the transac-tion to be in “the best interests of payee.”220 A House report describedsection 5891 as “[p]rotecting victims who sell structured settlementsfor a lump sum,”221 though, as one commentator notes, “the legisla-tion said remarkably little about the now much weakened and nebu-lous standard that required the factoring transaction.”222 More thansimply enacting the excise tax for transactions not approved by courts,the Act also “retroactively immuniz[ed previous] factoring transac-tions from tax challenges.”223

Though previous Congressional statements may have suggestedantipathy for factoring, and though section 5891 punishes factoringtransactions without court approval,224 the legislation seems to implic-itly approve of factoring under certain conditions.225 NSSTA226 and

219. I.R.C. § 5891(b)(1) (2006).220. I.R.C. § 5891(b)(2)(A)(ii) (2006). See generally HINDERT ET AL., supra note90, § 16.05[4]. R221. H.R. REP. NO. 107-801, at 5 (2003).222. Koenig, supra note 2 at 818. R223. Scales, supra note 2, at 918 (citing Victims of Terrorism Tax Relief Act of R2001, Pub. L. No. 107-134, § 5891, 115 Stat. 2436 (2002)).224. See I.R.C. § 5891 (2006).225. See HINDERT ET AL., supra note 90, § 16.03[3][a][i] (“The Victims of Terrorism RTax Relief Act recognizes that unanticipated circumstances, in some cases, justify atransfer of structured settlement payment rights.”); Richard Risk, Jr., Attorney Com-ments on Forthcoming Guidance on Use of Qualified Settlement Funds for Benefit ofSingle Claimant, 2008 TAX NOTES 30-19, Feb. 28, 2008 [hereinafter Risk, AttorneyComments] (“Since 2002, the payee has a right under Section 5891 to sell futurepayments, with advance written approval from a state court.”); E-mail from BettyGregware, Sales Executive, John Hancock Life Insurance Company to JeremyBabener, J.D. Candidate, Class of 2010, New York University School of Law (Mar.31, 2009, 1:48:48 EST) (on file with author) (“Federal statute 5891 does implicitlyapprove factoring through directing individuals to the state specific Periodic PaymentProtection Act statues [sic] for the requirements regarding how to change their peri-odic payments, which include court approval.”); E-mail from Earl Nesbitt, ExecutiveDirector, NASP to Jeremy Babener, J.D. Candidate, Class of 2010, New York Univer-sity School of Law (June 19, 2009) (on file with author) [hereinafter Nesbitt E-mail,June 19, 2009] (“Congress and 46 states would not have created laws specificallygoverning the sale of structured settlement payment rights if they did not want thesales to happen. The fact that they legislated in the area shows that they approve.”);Settlement Capital Corporation, Structured Settlements, http://www.setcap.com/edus-tructuredsettlements.aspx?pt=education (last visited Feb. 19, 2010) (“The passing of. . . IRC 5891 was monumental in establishing our industry’s credibility. This lawvalidated our industry and helps plaintiffs gain access to their structured settlementannuity payments. It also clarified that transfer sales are completely tax-free for boththe annuitants and the annuity providers.”). By passing legislation penalizing onlyunapproved factoring transactions, Congress’s legislation tends to show some degreeof approval, at least implicitly.



many others227 firmly disagree with this view.228 However, stateshave shown a desire to allow factoring transactions by passing “trans-fer acts”229 giving their courts the power to approve the transactions,thus triggering the section 5891 exemption. Currently, forty-sevenstates have transfer laws, providing courts the ability to approve trans-fers under varying guidelines.230 State courts have been handling

226. NSSTA’s counsel maintains that factoring is “fundamentally incompatible withthe purposes that structured settlements are intended to serve.” Ulman E-mail, Feb.16, 2009, supra note 39 (noting there might be a very few cases in which factoring Rwould make sense). Ulman takes exception to the argument that the passage of sec-tion 5891 somehow implicitly approved of factoring; “To read that as implied ap-proval of factoring is doing a grave disservice to those who passed the law.” Id.Asked why Congress did not go further in establishing a barrier to factoring transac-tions, counsel responds, “Factoring companies are capable of lobbying just as much asanyone else. Section 5891 is the result of legislative compromise.” Id.227. At least one court has held that section 5891 “does not establish a statutory rightfor such transfers.” Continental Casualty v. United States, No. C 02-4891 VRW, C02-5292 VRW, 2006 WL 3455055, at *2 (N.D. Cal. Nov. 29, 2006) (amended order)(rejecting an argument that a settlement’s anti-assignment clause destroys the congres-sionally created right to factor). In addition, some call the implicit approval assertion“propaganda and misinformation.” E-mail from John Darer, President, 4struc-tures.com. LLC, to Jeremy Babener, J.D. Candidate, Class of 2010, New York Uni-versity School of Law (Mar. 26, 2009, 2:30:31 EST) (on file with author) [hereinafterDarer Interview]. Darer argues that section 5891 was legislated “to levy an excise taxto cure abuses in prior years and state exceptions to such a tax.” Id. He cites toUnited States v. Testan, a United States Supreme Court case holding that the legisla-tion of a jurisdictional statute did not simultaneously create a substantive right. 424U.S. 392, 398 (1976). Thus, section 5891, legislating an excise tax, may not havesimultaneously created the substantive right to factor. It should be noted that Testanwas a suit against the United States. Because no right to money damages against theUnited States can exist without a waiver of sovereign immunity, the standard to estab-lish the granting of a right of action may have been higher. See id. at 400–01.228. The arguments for and against allowing factoring are elaborated upon in thenext sub-section.229. Scales, supra note 2, at 921. These are commonly called Structured Settlement RProtection Acts. HINDERT ET AL., supra note 90, § 16.04[1] (providing a table of the Rvarious state statutes).230. HINDERT ET AL., supra note 90, § 16.04[1] (not yet accounting for North Da- Rkota’s statute, N.D. CENT. CODE §§ 32-03.4-01 to -13 (Supp. 2009)); Structured Set-tlement Corporation, supra note 225. In 2000, the insurance and factoring industries Rworked together, Patrick Hindert, Structured Settlements in 2008—3, BEYOND STRUC-

TURED SETTLEMENTS, Jan. 31, 2009, http://s2kmblog.typepad.com/rethinking_struc-tured_set/2008/12/structured-settlements-in-2008-3.html, to establish a Model StateStructured Settlement Protection Act. The Act was later supported by the NationalConference of Insurance Legislators. Id. In the states without protection acts, factor-ing transactions can still occur. I.R.C. § 5891(b)(2)(B) (2006) (allowing a transferusing the act from the state of the factoring company or life insurance company thatissued the structured settlement annuity). Factoring companies do purchase structuredsettlements in those states. Bracy Interview, supra note 28. Bracy says that the RNASP hired lobbyists in almost every state to encourage the legislation of structuredsettlement protection acts. Id. Of course, this is probably because without those acts,as a result of the newly legislated section 5891, all factoring transactions would face



factoring cases ever since.231

Different states have passed differing transfer acts.232 Some, forexample, require the additional finding that the transfer is “fair andreasonable,”233 in addition to being in the best interests of the payee.Some courts,234 and in fact some statutes,235 refuse to approve trans-fers in excess of certain discount rates. In the end, however, it is wellestablished that the core of a best interest test is judicial discretion.236

Different judges scrutinize the applicable laws with different fo-cuses.237 However, this does not mean that state courts infrequentlyapprove factoring transactions. Many in the factoring industry reportapplication approvals of 95% or higher.238 Moreover, even when

the 40% excise tax. However, a Former Executive Vice President of NSSTA says thatall but one of the forty-six structured settlement protection acts resulted from NSSTAwork. Dyer Interview, supra note 53. R231. See generally 321 Henderson Receivables, L.P., v. Martinez, 816 N.Y.S.2d 298(Sup. Ct. 2006); In re Settlement Capital Cor., 769 N.Y.S.2d 817 (Sup. Ct. 2003);Settlement Capital Corp. v. State Farm Mut. Auto. Ins. Co., 646 N.W.2d 550 (Minn.Ct. App. 2002).232. Hindert & Ulman, supra note 102, at 19. At least one factoring company has Rrepeatedly attempted “to circumvent state structured settlement protection acts andbind settlement obligors and annuity issuers to arbitrations.” Allstate SettlementCorp. v. Rapid Settlements, Ltd., 559 F.3d 164, 172 (3d Cir. 2009).233. Hindert & Ulman, supra note 102, at 22. R234. See In re Settlement Capital Cor., 769 N.Y.S.2d 817, 829 (Sup. Ct. 2003).235. E.g., N.C. GEN. STAT. ANN. § 1-543.12(6) (West 2000).236. Hindert & Ulman, supra note 102, at 22 (citing In re Settlement Capital Cor., R769 N.Y.S.2d 817 (Sup. Ct. 2003)); Interview with Jane Solomon, Supreme CourtJustice, New York State Supreme Court, in New York, NY (Jan. 3, 2009) [hereinafterSolomon Interview] (citing broad discretion).237. Solomon Interview, supra note 236. As counsel for the NSSTA observed, “The R‘best interest’ standard under state structured settlement protection acts is as stringent,or as lax as judges choose to make it.” Ulman E-mail, Feb. 16, 2009, supra note 39; Rsee also HINDERT ET AL., supra note 90, § 8A.04[3] (“In practice, the review of an Rapplication for authorization varies greatly with the disposition of the assignedjudge.”); Nesbitt E-mail, June 19, 2009, supra note 225 (observing, that “[a]t the end Rof the day, it’s the judge,” and that there is at least one judge in Texas who has saidthat he will never approve a transfer, regardless of the circumstances).238. Milton & Dekruif, Firm Profile, http://www.lawyers.com/California/Glendale/Milton-and-DeKruif-3024685-f.html (last visited Feb. 18, 2010) (reporting a 98% ap-proval rate in over 3,000 transfers); Bracy Interview, supra note 28 (reporting a rate Rabove 95%); Solomon Interview, supra note 236 (reporting approving 75% of appli- Rcations in 2007). The statistics may be inflated by the fact that applications are some-times withdrawn. Ulman E-mail, Feb. 16, 2009, supra note 39. It is unclear how Rmany potential purchases factoring companies turn down in order to maintain thesehigh approval rates, though it is substantial. Bracy Interview, supra note 28; see RCravenho Interview, supra note 187 (noting that applications that are likely to be Rdenied are not likely to be made). One broker in the factoring industry reports neverhaving a settlement purchase sale application rejected. Id. (also reporting that at leastone company maintains a rejection rate of less than half of one percent). Factoringcompanies work to push their approval rate as high as possible for two reasons. First,



one’s application is denied, a structured settlement owner can typi-cally re-apply without a waiting period, or disclosing the previous de-nial to the subsequent court.239 The Pennsylvania Supreme Court hasrequired such disclosure through its rules of civil procedure,240 andcalls have been made for at least one other state’s supreme court to doso.241 Given that the factoring industry currently purchases over $200million of structured settlements each year, that is hardly surprising.242

E. Should Structured Settlement Recipients Be Allowed to Factor?

When considering whether to utilize a structured settlement,claimants will often know of their later ability to factor. In fact, somestructured settlement planners always discuss the option with their cli-ents.243 One such planner calls it a “clear benefit”244 to his clients,many of whom would not otherwise accept a structured settlement.245

An author once likened a plaintiff’s decision to delay receivingmuch of a settlement to the Odyssey’s Ulysses binding himself to themast of his ship so as to prevent his future self from abandoning thevessel and swimming to the Siren’s fatal shores.246 The author comi-

they typically pay for the application process. These range between $2,000 and$2,500. Bracy Interview, supra note 28; Cravenho Interview, supra note 187 (report- Ring transaction costs of between $3,000 and $4,000); 1999 Hearing (statement ofTimothy J. Trankina, Founder and CEO of Peachtree Settlement Funding) (reportingthat seeking court approval for a structured settlement could “easily cost the consumer10% or more . . . in attorney’s fees and court costs”). Second, each rejection mighthave negative consequences. Some like to say that factoring companies have two“customers: the real customer and the judge.” Bracy Interview, supra note 28. Both Rmust approve the transfer. Id. Some in the industry predict that the best interestsstandard will become more strict as judges become more familiar with it. Ulman E-mail, Feb. 16, 2009, supra note 39. R239. Edward O. Burke, Structured Settlement Factoring, 44 ARIZ. ATT’Y 23, 30(2008) (noting that at least one judge has ordered factoring companies to discloseprevious applications).240. See PA. R. CIV. P. 229.2 (f) (2007).241. Burke, supra note 239, at 30 (discussing Arizona). The author agrees with such Rcalls.242. Cravenho Interview, supra note 187. In 2007, one judge reported approving R75% of all factoring transaction applications. Solomon Interview, supra note 236. R243. Meligan Interview, supra note 31. One leading commentator suggests that Rwhile some structured settlement advisors will provide advice about factoring, mostdo not have the knowledge to do so. Hindert E-mail, Sept. 4, 2009, supra note 45. R244. Meligan Interview, supra note 31. R245. Id.246. Smith, supra note 56, at 1969–70 (citing JON ELSTER, ULYSSES AND THE SI- R

RENS: STUDIES IN RATIONALITY AND IRRATIONALITY 1-111 (rev. ed. 1984)). See gen-erally THE ODYSSEY OF HOMER 242–43 (Allen Mandelbaum trans., Bantam Classics1990) (“I sealed the ears of my crew in turn. That done, they bound my hands andfeet, as I stood upright on the mast box; and they tied the ropes hard fast around the



cally noted, “The difference between Ulysses and the plaintiff in thestructured settlement is that, so far as we know, Ulysses did not get atax break to encourage being bound.”247 Actually, as of the early1990s, there is another key difference; Ulysses could not untie himselffor a given price.

This section describes the reasons for and against allowing struc-tured settlement recipients to factor. The strongest argument for al-lowing factoring is that persons should be able to respond to changedcircumstances. In opposition, however, one must consider the purposeof binding one’s future self, and the costs of unbinding.248 The Articlethen considers whether allowing factoring renders the tax subsidy in-effective at accomplishing its purpose of discouraging premature dis-sipation, finding that factoring may strengthen the subsidy’seffectiveness.

1. The Right to Factor

No one can predict the future. Though structured settlements en-courage one to delay receiving monies so as to protect one’s futureinterest, they also force a claimant to make decisions about how muchmoney he or she will need, and when,249 often long before suchknowledge is available. Thus, the pre-arranged payments likely willnot accurately anticipate a claimant’s future needs.250 Where a struc-tured settlement owner, because of such unexpected needs, wishes tomake use of their future payments, it would not make sense to preventthem from doing so. Of course, the definition of “unexpected” be-comes the central variable in that argument. Through the 1999 legis-lation, Congress left that decision to the judgment of courts.251

One could also argue that Congress should allow factoring tocounteract plaintiff attorneys’ perverse incentive to inadequately re-

mast . . . . My heart longed so to listen, and I asked my men to set me free . . . . Butwhen we’d passed beyond the Sirens’ isle . . . [t]hey freed me from my mast.”).247. Smith, supra note 56, at 1969–70 (citing ELSTER, supra note 246, at 1-111). R248. Historically, there have also been accusations that the factoring industry used“abusive tactics against the disabled.” Randy Dyer, Letter to the Editor, StructuredSettlements Need Watchful Eye, N.Y.L.J., Oct. 21, 1999, at 2 (Executive Vice Presi-dent of National Structured Settlements Trade Association). At least some factoringcompanies circumvented anti-assignment clauses by directing plaintiff to send achange-of-address notice to the structured settlement company making the periodicpayments, and then sign over power-of-attorney privileges to the factoring company,allowing the periodic payments to be deposited by the factoring company. I.R.S. Priv.Ltr. Rul. 1999-36-030 (June 10, 1999).249. See Luther, supra note 42, at 30. R250. Andrada, supra note 36, at 477. R251. See I.R.C. § 5891 (2006).



present their clients. One author argues that such attorneys may notspend the necessary time to accurately design a structured settlementpayment schedule because they operate on a contingency fee basis.252

So long as the present value of the settlement remains the same, acontingency fee of 30% will produce the same payment whether thepayment schedule accurately predicts a clients’ needs or not. Thus,the ability to escape the structured settlement plan may compensatefor incentivized attorney misrepresentation.

These arguments suggest that Congress should allow factoring, atleast sometimes. In addition, positive notions of alienability favor theright to factor. While it is beyond the scope of this Article, somesupport for claimants’ alienability of their future structured settlementpayments can be found in the Uniform Commercial Code Revised Ar-ticle 9,253 which “has a general purpose of promoting commerce byallowing the pledging and other assignment of payment rights in orderto facilitate credit transactions.”254 Evidence for such a position canbe found in several sections of the Code’s 1999 Revision,255 and fac-toring companies have frequently cited Article 9 in asking courts to

252. Andrada, supra note 36, at 477. R253. PAUL J. LESTI, STRUCTURED SETTLEMENTS § 19:11.1. (2d ed. 2008) (“If a statepasses the revision to Article 9 of the U.C.C. in its current proposed form, it appearsthat factoring transactions will be allowed under that state’s U.C.C. However, manystates that have passed or considered this revision to their state’s U.C.C. law haveamended it to prevent a person from factoring their rights under structured settlement,workers’ compensation and special needs trust arrangements.”). Some also cite to theRestatement (Second) of Contracts. See HINDERT ET AL., supra note 90, § 16.02[2][f] R(holding that a contract can be assigned unless (a) the substitution of the right wouldmaterially change the obligor’s duty, burden, risk, or materially reduce the value ofhis contractual right, or (b) the assignment is ineffective on statutory or public policygrounds, or (c) the assignment is legitimately prohibited by contract) (citing RESTATE-

MENT (SECOND) OF CONTRACTS § 317(2) (1981)).254. HINDERT ET AL., supra note 90, § 16.02[2][e] (“When Article 9 was revised in R1999, a major purpose was to expand the range of financial obligations covered byArticle 9, and thus eligible for assignment despite contractual anti-assignmentlanguage.”)255. U.C.C. § 9-102, Official Comment 15 (2000) (“Note that once a claim arisingin tort has been settled and reduced to a contractual obligation to pay (as in, but notlimited to, a structured settlement), the right to payment becomes a payment intangi-ble and ceases to be a claim arising in tort.”); id. at § 9-406(d)(1) (holding an agree-ment term between account debtors and assignors ineffective, with exceptions, to theextent that it “prohibits, restricts, or requires the consent of the account debtor orperson obligated on the promissory note to the assignment or transfer of, or the crea-tion, attachment, perfection, or enforcement of a security interest in, the account, chat-tel paper, payment intangible, or promissory note”); see LESTI, supra note 253; RHINDERT ET AL., supra note 90, § 16.02[2][e]. See generally id. § 9-101 (citing § 9- R102 for the definition of a “Commercial tort claim”).



ignore anti-assignment language in structured settlement contracts.256

However, there are substantive counter-arguments to the assertion thatArticle 9 applies to structured settlement factoring transactions.257

2. Factoring Discount Rates

In allowing factoring, it is important to recognize that the cost offactoring to a structured settlement recipient may render such transac-tions adverse to public policy goals. Again, the purpose of the taxsubsidy is to encourage plaintiffs to delay receipt of their money so asto maintain funds for their later life needs. Even if a change in cir-cumstances places the owner of a structured settlement in a difficultfinancial position, selling their future stream of income at a high dis-count rate could reduce their award or settlement value so as to guar-antee that their later financial needs will not be met.258

Historically, discount rates have been very high, even reaching55%, 65%, and 75%.259 This means that a structured settlementowner due future payments with a present value of $100,000 mightsell the stream of income for an immediate lump-sum of $25,000. Au-thors point to plaintiffs selling their future payments in desperation asthe primary cause of the factoring industry’s growth.260

256. HINDERT ET AL., supra note 90, § 16.02[2][e] (specifically noting § 9.318(4) of RArticle 9 prior to the 1999 Revision, and § 9-109(d)(8) of Article 9 of the 1999Revision).257. U.C.C. § 9-109(d)(8) (2000) (holding Article 9 inapplicable to “a transfer of aninterest in or an assignment of a claim under a policy of insurance, other than anassignment by or to a health-care provider of a health-care-insurance receivable”); seeHINDERT ET AL., supra note 90, § 16.02[2][e]; LESTI, supra note 253, § 19:11. In Rfact, the majority of states have specifically legislated that Article 9 is inapplicable tostructured settlements. HINDERT ET AL., supra note 90, § 16.02[2][e]. R258. Goldberg & Mauro, supra note 1, at 64. Of course, the high discount rate may Rvery well result from the structured settlement recipient’s lack of other options. SeeHalpern, Protecting Plaintiffs From the Squandered Settlement, N.C. L. WKLY., Dec.1, 2008, at 13. Those in the factoring industry agree that claimants selling structuredsettlements are typically in “dire straights . . . and with no other options.” CravenhoInterview, supra note 187. As few as 10% of those selling their settlements are likely Rnot in such an ominous situation. Id. In analyzing the 1999 proposed factoring legis-lation, the Joint Committee on Taxation acknowledged the argument that “deep dis-counting of the value of the payment stream may financially disadvantage injuredpersons that the [subsidy] was designed, in part, to protect.” JOINT COMM. ON TAXA-

TION, 106th CONG., TAX TREATMENT OF STRUCTURED SETTLEMENT ARRANGEMENTS

(Comm. Print 1999).259. Sale of Structured Settlements Received in Tort Claims: Disclosure and CourtApproval Requirements: Hearing on S.B. 491 Before the S. Judicial Comm., 1999Leg. (Cal. 1999) (statement of Sen. Johnston); Andrada, supra note 36, at 472 (citing RMannix, supra note 27, at 66; O’Connell, supra note 27, at A8). R260. Andrada, supra note 36, at 473 (describing factoring as an option of “last Rresort”).



Until recently, discount rates decreased substantially. Thoughhigh discount rates of 30% or more were common in the early 1990s,they dropped by half before the end of the decade,261 averaging be-tween 16% and 18%.262 The decline continued until the financial cri-sis in 2008.263 The average discount rate may have reached as low as8% or 9%,264 though some companies continued to charge rates be-tween 15% and 20%.265 However, after the 2008 financial crisis, av-erage rates rose again to over 14% or 15% within the first few monthsof 2009, often approaching 20%.266

Some argue that high discount rates are a necessary evil.267 Suchauthors have pointed to the need for factoring companies to borrowmoney at high rates,268 increasing their total capital costs.269 Clearly,

261. Scales, supra note 2, at 930 (citing Interview with Earl Nesbitt, Vice President Rand General Counsel, Settlement Capital Co., in Halladale, Fla. (Oct. 29, 2001)). Butsee Sale of Structured Settlements Received in Tort Claims: Disclosure and CourtApproval Requirements: Hearing on S.B. 491 Before the S. Judicial Comm., 1999Leg. (Cal. 1999) (statement of Sen. Johnston) (reporting above 50% rates in 1999);1999 Hearing, supra note 15, at 33 (Statement of Timothy J. Trankina, Founder and RCEO of Peachtree Settlement Funding) (reporting an average discount rate of 16% to22%, but acknowledging discount rates of 30% in some circumstances).262. 1999 Hearing, supra note 15, at 18 (written statement of John E. Chapoton, RPartner, Vinson & Elkins, L.L.P., on behalf of the National Association of SettlementPurchasers).263. Bracy Interview, supra note 28. R264. Id. (estimating an average discount rate between 9% to 11%); Cravenho Inter-view, supra note 187 (estimating an average discount rate between 8% to 10%). R265. Cravenho Interview, supra note 187. Others estimate that the average discount Rrate in early 2008 was 13%, but climbed to 16% or higher in late 2008, primarily dueto the lack of available capital. Nesbitt E-mail, June 19, 2009, supra note 225. Had Rthe crisis not occurred, Nesbitt believes that the rate would have fallen to an averageof 12%. Id.266. Bracy Interview, supra note 28; cf. Cravenho Interview, supra note 187 (indi- Rcating rates of 10% to 12% at the beginning of 2009). As noted in the Part III.B.,funding for factoring companies has become less available, and thus the price of bor-rowing such funds has increased. Bracy Interview, supra note 28. As a result, dis- Rcount rates have increased. Id. Discount rates will also likely be higher for riskierannuities, such as AIG. Still, at least some factoring companies will purchase AIGannuities. Id. (stating that Settlement Capital Corp. will do so). There was a reportin 2009, however, that discount rates were available for as low as 7.75%. John D.Darer, If You Have to Sell, Don’t Get Ripped Off! Effective Discount Rates as Low as7.75%, STRUCTURED SETTLEMENTS 4REAL, http://structuredsettlements.typepad.com/structured_settlements_4r/2009/08/if-you-have-to-sell-dont-get-ripped-off-effective-discount-rates-as-low-as-775.html (Feb. 19, 2010).267. See Scales, supra note 2, at 930. R268. Id. at 931 (citing J.G. Wentworth Amended Registration Statement, at http://www.sec.gov/archives/edgar/data/1047706/0000950115-97-001940. txt (Dec. 11,1997)) (citing a borrowing rate of 9%).269. Scales, supra note 2, at 931 (noting capital costs of between 11% and 14%); see Ralso 1999 Hearing, supra note 15, at 33 (statement of Timothy J. Trankina, Founder Rand CEO of Peachtree Settlement Funding) (pointing to capital costs as high as 10%



a factoring company cannot offer discount rates below what is re-quired for operating costs. However, although the business modelmay demand such high rates, its cost to structured settlement recipi-ents could still render factoring a contravention of public policy.

Of course, factoring companies are not forcing themselves onstructured settlement recipients. Former personal injury claimantsvoluntarily enter into such transactions. And, in fact, the factoringindustry claims that 92% of claimants who sell their right to futurepayments are satisfied with their decision.270 According to factoringindustry statistics, these owners likely understand what they are los-ing. According to J.G. Wentworth, over 70% of surveyed structuredsettlement sellers received periodic payments for over ten years.271

Another factoring company reported that over 85% of structured set-tlement sellers are gainfully employed.272

Still, many describe selling as a decision of “last resort.”273 Thelatter description likely explains why some factoring companies arereporting increased purchasing274 even as discount rates climb.

3. Undermining and Promoting the Subsidy’s Purpose

Having recounted the nature of factoring, we can considerwhether allowing factoring truly undermines Congress’s purpose increating the tax subsidy. Clearly, the ability to sell one’s structuredsettlement undermines the self-binding nature of the structured settle-ment. Equally clear, the significant losses incurred via high discountrates may increase the chances of former claimants requiring latergovernment support, again undermining the tax subsidy’s purpose.

as a result of “not hav[ing] access to traditional sources of capital”). Because thesafety net of state guaranty associations may very well not apply to factoring compa-nies, access to capital is more expensive. See Settlement Quotes, A Couple Points,Oct. 30, 2008, http://www.structuredsettlement-quotes.com/blog/?p=171#more-171(stating that the protections of guaranty associations do not apply to factoringcompanies).270. 1999 Hearing, supra note 15, at 20 (written statement of John E. Chapoton, RPartner, Vinson & Elkins, L.L.P., on behalf of the National Association of SettlementPurchasers).271. The #1 Reason, supra note 18. R272. 1999 Hearing, supra note 15, at 35 (written statement of Timothy J. Trankina, RCEO of Peachtree Settlement Funding, on behalf of the National Association of Set-tlement Purchasers) (representing that more than 85% of those selling are employedand without long term disability).273. Andrada, supra note 36, at 473; Bracy Interview, supra note 28. R274. Bracy Interview, supra note 28 (reporting an increase in purchasing volume of R10%). As noted elsewhere, however, decreased access to funding has severely limitedthe amount of purchasing that some factoring companies can afford. See supra PartIII.B.



However, in two equally significant ways, factoring allows the struc-tured settlement tax subsidy to operate and fulfill its purpose of dis-couraging premature settlement dissipation.

As noted, there is a strong argument for allowing structured set-tlement recipients to sell their future periodic payments when they en-counter unpredicted financial changes. In those situations, factoringdoes not violate the justification.275

Second, for all structured settlement payees, those in financialstraits and those not, factoring does not reduce the incentive to struc-ture. It is true that nearly all applications for factoring transactions areapproved.276 But, it is also true that many plaintiffs may utilize astructured settlement only because they learn of the ability to factor.277

And, it must be remembered that the factoring company is not entitledto the same tax subsidy exclusion of periodic payments as the claim-ant.278 As a result, the company’s payment to the claimant will notincorporate the value of the tax subsidy.279 Thus, in choosing to fac-tor, the claimant must sacrifice the monetary encouragement that Con-gress legislated to encourage the use of structured settlements.Though factoring allows claimants to alienate the future rights thatCongress hoped they would not, the tax subsidy continues to operate,discouraging them from doing so.

In fact, the ability to factor likely supports the tax subsidy’s goalby encouraging the use of structured settlements. Before factoring be-came common, several commentators noted that the inability to alien-ate one’s future payments was a strong disadvantage to the structuredsettlement.280 This is no longer the case. Practitioners have noted thatthe increased flexibility of the modern structured settlement makestheir use more likely,281 though only 5% actually end up factoring.282

Thus, while it is true that Congress’s implicit approval of factoring,

275. It could be argued that one’s knowledge of the ability to factor in the case offinancial challenge renders one more likely to end up in financial straits.276. See supra note 238. R277. Meligan Interview, supra note 31. But see McCulloch E-mail, supra note 17 R(referring to factoring “not [as] a right, but rather a right to ask”).278. E-mail from Matt Bracy, General Counsel of Settlement Capital Corp. to Jer-emy Babener, J.D. Candidate, Class of 2010, New York University School of Law,Apr. 15, 2009; see I.R.C. § 104(a) (2006).279. The lost tax subsidy is reflected by the proportionately higher discount rate.While the former claimant does not pay tax on the lump-sum purchase amount re-ceived from the factoring company, it indirectly does so through the discount rate,which must reflect the income tax cost to the factoring company for receiving thefuture payments.280. E.g., Yandell, supra note 50, at 73. R281. E.g., Meligan Interview, supra note 31. R282. Nesbitt E-mail, Sept. 11, 2009, supra note 183. R



after court approval, substantially erodes the application of the con-structive receipt doctrine to structured settlements, doing so may verywell further public policy ends.283

F. Looking Back at Where Congress Began

Consider where the exclusions for structured settlements began.One revenue ruling allowed a structured settlement recipient to ex-clude the periodic payments, after noting that the recipient had norights to the annuity itself.284 A second revenue ruling allowed theexclusion of periodic payments because plaintiff received “neither ac-tual nor constructive receipt, nor the economic benefit of the presentvalue of the damages.”285 Three years later, the committee reports forthe Periodic Payment Settlement Tax Act of 1982 stated, “the periodicpayments as personal injury damages are still excludable from incomeonly if the recipient taxpayer is not in constructive receipt of or doesnot have the current economic benefit of the sum required to producethe periodic payments.”286

Clearly, the 1988287 and 2001288 enactments relaxed the applica-tion of the constructive receipt and economic benefit doctrines tostructured settlements. Plaintiffs can hold greater rights to their peri-odic payments than general creditors,289 and sell those rights for theirpresent value upon a state court’s approval. As the constructive re-ceipt and economic benefit doctrines relate to the claimant’s level ofcontrol over the settlement monies, it seems logical to assert that thedeconstruction of the two doctrines contravenes Congress’s statedgoal of preventing claimants from quickly dissipating their settle-ments. Simply stated, monies cannot be prematurely dissipated unlessthey are received, or the right to receive them in the future is alienable.

However, though a structured settlement recipient has been givengreater and more flexible rights with regard to their expected futureperiodic payments, the strong incentive of the tax subsidy endures.

283. It is important to remember that where court approval is a rubber-stamp, ratherthan the result of substantive consideration, the argument may fail to hold. See supraPart III.D.284. Rev. Rul. 79-220, 1979-2 C.B. 74.285. Rev. Rul. 79-313, 1979-2 C.B. 75.286. H.R. REP. NO. 97-832, at 4 (1982) (emphasis added); S. REP. NO. 97-646, at 3(1982) (emphasis added).287. Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647,§ 6079(b)(1)(A)-(B), 102 Stat. 3342.288. Victims of Terrorism Tax Relief Act of 2001, Pub. L. No. 107-134, § 5891, 115Stat. 2436 (2002).289. Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647,§ 6079(b)(1)(B), 102 Stat. 3342.



Personal injury victims considering the use of a structured settlementare now encouraged by the increased security of their future payments,due to the 1988 amendment, as well as the alienability of their futurepayments, due to the 2001 legislation. In considering whether to sellone’s payments however, the created subsidy operates to incentivizeagainst doing so.

IV.HELPING THE WRONG PARTY

Thus far, this Article has demonstrated the initial applicabilityand subsequent erosion of the constructive receipt and economic bene-fit doctrines as applied to structured settlements. This Part providesthe context for the most recent, and quite substantial continuation ofthese two patterns: the use of qualified settlement funds in single-claimant cases, to be discussed in Part V. As will be shown, qualifiedsettlement funds in single-claimant cases are sometimes used to cir-cumvent a defendant’s or liability insurer’s ability to reap a substantialportion of a structured settlement’s monetary benefits. This sectiondescribes the three ways that defendants and liability insurers can doso, and argues that such an ability may contravene Congress’s purposein subsidizing structured settlements.290

A. Capturing the Monetary Benefits of a Structured Settlement

Proponents of structured settlements often speak of a structuredsettlement’s ability to benefit both sides, allowing plaintiff to receivemore, while defendant pays less.291 Defendants are able to capturemuch of the benefit resulting from the use of a structured settlement.Likely for this reason, those inside and outside the industry believethat the structured settlement was either a “defense tactic”292 from thebeginning,293 or became one thereafter.294 Often represented by their

290. Of course, benefits accrue to defendants and liability insurers without the sub-sidy. However, the subsidy increases the benefits by increasing the overall number ofstructured settlements.291. See, e.g., Scales, supra note 2, at 880–81; Goldberg & Mauro, supra note 1, at R39; A Roundtable, supra note 10, at 70 (comments of Roger Warin). R292. Risk, Structured Settlements, supra note 19, at 868. R293. Id.294. Scales, supra note 2, at 897 (Scales reports being told by a major multi-line Rinsurer when researching the structured settlement that it has been “a defense productfrom the beginning”). In 1999, the factoring industry argued that insurance compa-nies use structured settlements to reduce costs. 1999 Hearing, supra note 15, at 36 R(written statement of Timothy J. Trankina, CEO of Peachtree Settlement Funding, onbehalf of the NASP). NASP presented evidence from an insurance company’s man-ual; “The primary objective in expanding the use of structured settlements is to maxi-



insurers during settlement negotiations,295 defendants have enjoyedthe advantages of experience, partly as a result of being “repeat play-ers.”296 As a consequence, some argue that “physically injured vic-tims often are victimized a second time, unknowingly to them, whenthe settlement is made.”297 Over the years, estimates of defense-sidesavings have decreased from between 50% and 75% in 1974,298 tobetween 20% and 40% in 1978,299 and recently to between 20% and25%.300 The decline is likely a result of plaintiff lawyers’ increased

mize their value as a tool to reduce both claim loss and expense costs.” Id. (quotingThe Travelers Structured Settlement Manual). The factoring industry also cited to atelling trial transcript. In the cited trial, counsel to State Farm argued that one of thestructured settlement tax exemption’s purposes is to protect the plaintiff. Id. at 33(citing Transcript of Record, Stone Street Capital v. Jackson, Civ. No. 176131). Thecourt admonished, “No it is not. The reason for setting up these structured paymentsare so that the insurance companies can settle out cheaper.” Id. at 34. When counseltried to respond, the court interrupted, “That is the reason. That is the reason.” Id.With these and other examples, the factoring industry argued that NSSTA’s antago-nism for the factoring industry was based on the industry educating the public aboutthe true value of structured settlements. Id. at 33 (written statement of Timothy J.Trankina, CEO of Peachtree Settlement Funding, on behalf of the NASP). Similarremarks were made in contemporary articles. James D. Terlizzi, Perspective, Under-stand Structured Settlement Refinancing Issues, N.Y. L.J., Sept. 27, 1999, at L7, L15(General Counsel and Chief Operating Officer of Peachtree Settlement Funding ofNorcross, Ga., a factoring company).295. Goldberg & Mauro, supra note 1, at 35–36. R296. Smith, supra note 56, at 1972. Commentators complain that claimants’ attor- Rneys often allow defendants or defendants’ insurers to control the structuring of thesettlement. See Risk, Structured Settlements, supra note 19, at 887. However, this Rproblem may be diminishing, as plaintiff attorneys become increasingly assertive inthe structuring of their clients settlements. See id. at 901. Guides to plaintiff lawyerswarn readers to guard against some of defense practices discussed above. See STE-

PHEN J. HERMAN, Personal Injury Settlements, in PLAINTIFF’S PERSONAL INJURY

FROM START TO FINISH 94 (2006).297. Risk, Structured Settlements, supra note 19, at 888. Risk argues that plaintiffs Rare legally entitled to the tax subsidy, see id. at 892, and reports, “Many plaintiffattorneys who rightly were concerned over their own exposure to a legal malpracticeclaim by allowing the adversary to handle this transaction on behalf of their clientsimply had their clients take the cash.” Id. at 892.298. Choulos, supra note 21, at 74 (citing Wallace E. Sedgwick & William C. Judge, RThe Use of Annuities in Settlement of Personal Injury Cases, 44 INS. COUN. J. 548(1974)).299. Periodic Payments Prove Aid to Accident Victims, J. COM. & COM., Mar. 20,1978, at 8 (quoting Kenneth Wells, a consultant at Walker, Sullivan and Co. of LosAngeles).300. Scales, supra note 2, at 882; see also Risk, Structured Settlements, supra note R19, at 870; JOINT COMM. ON TAXATION, 106TH CONG., TAX TREATMENT OF STRUC- RTURED SETTLEMENT ARRANGEMENTS (Comm. Print 1999) (“[A]nother possible out-come is that the defendant could spend somewhat less . . . and purchase an annuity aspart of a structured settlement arrangement that would pay the recipient . . . [less]annually for the rest of his or her life. Under this scenario, the recipient would beindifferent as between choosing the structured settlement arrangement and receiving a



familiarity with structured settlements and the use of plaintiff-sidebrokers.301 Of course, these estimates are just that, estimates.302 Theauthor was unable to find any empirical support.

Whether or not such savings occur frequently today, defendantsand liability insurers have proven themselves capable of utilizing thestructured settlement to minimize303 their damages in three ways: (A)

lump sum payment of [more money]. . . . However, the defendant would save [asubstantial amount] in expenditures to settle the case.”).301. HINDERT ET AL., supra note 90, § 1.04[4] (“During the early development of Rstructured settlements, defendants maintained an information and resource advantageover plaintiffs, a condition that dissipated in the 1990’s.”) (citing Rudnitsky & Blys-kal, supra note 9, at 29); NSSTA Letter, supra note 14, at 3 (asserting that both Rdefendants and plaintiffs generally have brokers); Darer Interview, supra note 227 R(noting that while some plaintiffs may agree to a structured settlement without a struc-tured settlement expert, such cases are becoming increasingly rare, as their attorneysbecome educated on the increasing complexity of settlement planning issues and bringin settlement consultants as part of the team). See Bracy Interview, supra note 28 R(stating that plaintiff attorneys and plaintiff-side brokers became more aware of struc-tured settlements about ten years ago, and that both plaintiffs and defendants oftenhave brokers); Ulman E-mail, Feb. 16, 2009, supra note 39 (noting that claimants Rattorneys have become more knowledgeable about structured settlements).302. Some question whether defendants truly save money by using structured settle-ments at all. E-mail from Patrick J. Hindert, Managing Director, S2KM Ltd., to Jer-emy Babener, J.D. Candidate, Class of 2010, New York University School of Law.(Aug. 17, 2009, 8:33:00 EDT) (on file with author) [hereinafter Hindert E-mail, Aug.17, 2009]. They ask two important questions. First, “Where is the independent, ob-jective proof?” Id. And second, “Why would an informed plaintiff attorney everknowingly accept a lower fee from his client for a structured settlement costing defen-dants less than an alternative cash settlement?” Id. The author could find no data toanswer the first question. However, the second question can be answered. Calculatingthe alternative fees from a structured versus lump-sum settlement may be outside ofthe plaintiff attorney’s abilities. Where defendants do save money, that same com-mentator lists the primary reasons as “1) misrepresentation, 2) failure to disclose; or 3)negotiation pressure.” Id. Thus, he recommends that plaintiff attorneys be “moreaggressive in discovery to elicit information from defendants about structured settle-ment compensation, conflicts of interest, and company policies as well as more accu-rate cost and present value calculations.” Id. (“If you ignore profits from productsales and assume full disclosure of compensation and costs with no misrepresentationsand no unauthorized practice of law (agents providing legal services to save defen-dants legal costs), I don’t see how defendants save money using structuredsettlements.”).303. It may be more accurate to describe defendants as minimizing damages, or off-setting costs, rather than “saving” through these three strategies. Some disagree withthe characterization of these practices as “savings.” E-mail from Richard B. Risk, Jr.,Attorney, Risk Law Firm, to Jeremy Babener, J.D. Candidate, Class of 2010, NewYork University School of Law (Aug. 15, 2009, 12:16:27 EST) (on file with author)[hereinafter Risk E-mail] (using language such as “bridging the gap” or “offset[ting]the cost of settling a claim”). However, the term “saving” is used here simply to meanthat defendants end in a financially superior position by using a structured settlementthan by using a lump-sum. This is done by either paying less, or by recouping someof their payment by profiting elsewhere.



negotiating future payments based on nominal, rather than real value,(B) profiting through the purchase of the structured settlement annu-ity, and (C) negotiating to benefit from the tax subsidy.304 Based onthe research below, the author concludes that defendants and liabilityinsurers do minimize settlement costs through structured settlementstoday. Because the tax subsidy encourages structured settlements, itmakes the first two cost minimization methods more available.

1. Negotiating on Nominal Terms

Due to inflation, one dollar in ten years is worth far less than onedollar today. If invested prudently, one dollar today will increase invalue faster than inflation. Thus, a defendant who can promise plain-tiff $100,000 spread out in monthly payments over ten years is farbetter off doing so than paying plaintiff $100,000 in cash today. Aswill be shown below, defendants prefer to negotiate in terms of futurenominal dollars, rather than present value. Defendants have beenutilizing this strategy, called a “short-changing scheme”305 by a courtof law, for over four decades.

Many have documented defendants and their insurers not disclos-ing the present value or cost of the structured settlement to plaintiff inthe past.306 By withholding such information, defendants deceive307

304. The frequency of these strategies being successfully practiced today will bediscussed. One settlement planner believes them to be practiced “rarely,” “fre-quently,” and “occasionally,” respectively. E-mail from Jack L. Meligan, PlaintiffLoyal Settlement Planner, Settlement Professionals Inc., to Jeremy Babener, J.D. Can-didate, Class of 2010, New York University School of Law (Aug. 20, 2009, 3:54:43EST) (on file with author).305. Macomber v. Travelers Prop. & Cas. Corp., 804 A.2d 180, 186 (Conn. 2002);see Lyons v. Med. Malpractice Ins. Ass’n, 730 N.Y.S.2d 345, 346, 286 A.D.2d 711,712 (N.Y. App. Div. 2001) (reversed and remanded on the factual issue of insurerrepresentation after finding privity between a plaintiff and defendant for purposes ofthe represented value of the structured settlement).306. See Andrada, supra note 36, at 471–72; ROBERT W. WOOD, TAXATION OF DAM- R

AGE AWARDS AND SETTLEMENT PAYMENTS § 7.24 (3d ed. 2005) [hereinafter WOOD,TAXATION OF DAMAGE AWARDS]; LESTI, supra note 253, § 1:2; Risk, Structured Set- Rtlements, supra note 19, at 888; Frolik, supra note 55, at 573–74; 1999 Hearing, Rsupra note 15, at 19 (written statement of John E. Chapoton, Partner, Vinson & El- Rkins, L.L.P., on behalf of NASP); id. at 34 (statement of Timothy J. Trankina,Founder and CEO of Peachtree Settlement Funding); A Roundtable, supra note 10, at R76 (comments of Herb Cumming). But see NSSTA Letter, supra note 14, at 3 (“In- Rdustry practice is to provide the claimant and counsel with a detailed factual presenta-tion regarding the cost of various components of the settlement, including the annuitycost and total future payout for the structured payments. Industry practice is to spellout the annuity cost as part of the settlement offer. Plaintiff’s counsel has to know thecost of the structured settlement annuity in order to calculate the attorney’s fee, whichmust be determined on the basis of the present value of the settlement.”). Some in theinsurance industry argue that it is not difficult for a plaintiff attorney to learn the



plaintiffs into believing that the settlement is worth more than its truevalue.308 For example, one case regarded the representation by theMedical Malpractice Insurance Association to plaintiffs that a struc-tured settlement package, including an annuity providing for paymentsof $3,000 per month for life to an infant, carried a present value of$940,180.309 In fact, the package’s true present value was$410,000.310

In the past, the insurance industry has taken steps to maintainplaintiffs’ lack of present value information. It has done so boththrough misinformation and political action. For years, defendantsand insurers maintained that plaintiffs and their attorneys could notknow the present value or cost of a structured settlement withoutbreaching constructive receipt.311 Such receipt would prevent plaintifffrom utilizing the tax benefit of section 104(a)(2). This has been helduntrue.312 Later, defendants and insurers also asserted that involve-

present value of an offered structured settlement. See Dyer Interview, supra note 53. RThough a broker providing such information may not earn a commission by advisingin that transaction, he or she will often advise anyway, hoping to make commissionson the requesting attorneys’ subsequent settlements. See id.307. Some commentators find defendants’ representation of structured settlements’values to constitute fraud. Risk, Structured Settlements, supra note 19, at 889. ROthers simply argue that a claimant’s attorney should always know the cost to defen-dant. See A Roundtable, supra note 10, at 76 (comments of Lawrence Charfoos); id. Rat 76 (comments of Herb Cumming).308. See Andrada, supra note 36, at 471–72; WOOD, TAXATION OF DAMAGE RAWARDS, supra note 306, § 7.24; LESTI, supra note 253, § 1:2; Goldberg & Mauro, Rsupra note 1, at 44; Frolik, supra note 55, at 573–74; 1999 Hearing, supra note 15, at R19 (written statement of John E. Chapoton, Partner, Vinson & Elkins, L.L.P., on be-half of NASP); id. at 34 (written statement of Timothy J. Trankina, CEO of PeachtreeSettlement Funding, on behalf of the National Association of Settlement Purchasers);Terlizzi, supra note 294, at L7 (General Counsel and Chief Operating Officer of RPeachtree Settlement Funding of Norcross, Ga., a factoring company); A Roundtable,supra note 10, at 76 (comments of Herb Cumming). However, Cumming noted that Rplaintiff attorneys had a relatively new tool available, Merrill Lynch’s Total Agree-ment program, which enables a plaintiff attorney to “determine the value of a case andthen to consider what income stream that money could provide to best meet the needsof the client, given his or her age, family situation, and so forth. . . . The present dayvalue or cost of a settlement need not be a secret anymore.” Id.; see also id. at 80(comments of Charles Krause).309. Lyons v. Med. Malpractice Ins. Ass’n, 730 N.Y.S.2d 345, 346 (N.Y. App. Div.2001).310. Id.311. E.g., Joseph E. Murphy, Structured Settlements, THE VERDICT, Oct. 1986, at 11(“It is of the utmost importance that in describing such an annuity, the purchase priceof the annuity not be mentioned but simply the schedule of payments.”); cf. GregwareInterview, supra note 17 (stating that over fifteen years ago, it was widely believed Rthat claimant knowledge of present value would constitute constructive receipt).312. See I.R.S. Priv. Ltr. Rul. 90-17-011 (Jan. 24, 1990) (“[T]he exclusion fromgross income does not apply to punitive damages in connection with a case not result-



ment of a plaintiff broker in structured settlement negotiations consti-tutes constructive receipt.313 Commentators have argued that this isfalse as well.314

The insurance industry has also worked to prevent plaintiff-sidesupport for structured settlement negotiations from growing. Onecommentator argues, “Although [NSSTA’s] mission statement doesnot overtly exclude plaintiff advocates, NSSTA was organized bythose who wanted to preserve the structured settlement concept as adefense tool.”315 For example, in 1999, NSSTA worked to defeat pro-posed legislation in both Florida and New Hampshire that would haveallowed structured settlement plaintiffs to select their broker and fund-ing structure.316 Members of NSSTA have acted similarly. Fromearly on, commentators report, “annuity issuing life insurance compa-nies . . . restricted their appointments to those brokerages (generalagencies) that would prohibit their individual agents from working onbehalf of injury victims and their attorneys.”317 While many of thesetactics are no longer employed, others allegedly continue.

Currently, there is a class action against Hartford Financial Ser-vices Group alleging that Hartford’s liability insurer subsidiaries “op-erate in tandem [with inside and outside brokers] to deliberately erectan information barrier to protect defense interests.”318 Plaintiffs alsoallege that Hartford and its in-house brokers “colluded to submitfalsely inflated cost information to unwitting injury claimants (andtheir attorneys when retained) about the true amount of money whichHartford invests to purchase the funding annuity.”319

There is some question as to the frequency of this practice occur-ring today. As one attorney puts it, “Today, only a very naıve attorneywould not insist on knowing the cost of the proposed settlement onbehalf of a client. Unrepresented claimants, however, might still be

ing in physical injury or physical sickness.”); see also I.R.S. Priv. Ltr. Rul. 83-33-035(May 16, 1983) (“[Y]ou will have neither actual nor constructive receipt, nor theeconomic benefit of the present value of the amount invested in the annuity, and theperiodic payments will be excludable from your gross income under section 104(a)(2)of the Internal Revenue Code.”).313. Risk, Structured Settlements, supra note 19, at 894. R314. Id. at 895.315. Id. at 881.316. Id.317. Id. at 882.318. Plaintiff’s Class Complaint at ¶ 41, Doc. 1, Spencer v. Hartford Fin. Serv.Group, (No. 3:05-cv-01681-JCH) (D. Conn. Oct. 31, 2005). The complaint allegesthat Hartford’s liability carriers “typically do not reveal to injury claimants (or theirattorneys) any information about the commission agreements they have with theirappointed brokers.” Id.319. Id. at ¶ 43.



misled and taken advantage of by this tactic.”320 Thus, the occurrenceof this strategy, as opposed to the subsequent two, may be rare.321

2. Defendants’ Insurers Can Profit from Structured Settlements

Where the casualty insurer is part of a larger insurance company,which also holds a life insurance company, the insurer can profit bypurchasing an annuity from its affiliate. Plaintiff representatives re-port cases of defendants’ insurers refusing to structure a settlementunless the annuity was purchased from the company’s approved list oflife insurance companies.322 Unfortunately, that list might exclusivelyconsist of affiliate companies, and non-affiliated companies with sub-standard annuities.323

Internal insurer memos published show that some insurers havedone their best to purchase from affiliates in the past.324 Where the

320. Risk E-mail, supra note 303. R321. See Meligan E-mail, supra note 304 (suggesting that it is “rare”). R322. E-mail from Lawrence Grassini, Partner, Grassini & Winkle, to JeremyBabener, J.D. Candidate, Class of 2010, New York University School of Law (Apr.20, 2009, 15:07:38 EST) (on file with author) [hereinafter Grassini E-mail] (noting acase within the last few years); E-mail from Ritch McBride, President, Plaintiff-Quote.Com, to Jeremy Babener, J.D. Candidate, Class of 2010, New York UniversitySchool of Law (Apr. 23, 2009, 14:46:22 EST) (on file with author) [hereinafter Mc-Bride E-mail].323. Grassini E-mail, supra note 322 (discussing such a case); McBride E-mail, Rsupra note 322. One might respond that liability insurers would always wish to find Rthe best priced annuity so as to limit costs. However, some argue that the benefit ofdirecting business to an affiliate or friendly life insurance company is sometimesgreater. Id. Life insurance companies’ approved lists are sometimes available. Forexample, AIG’s 2007 list of approved life insurance companies included its two affili-ates, American General Life Insurance Co., American International Life AssuranceCo. of NY, and four other life insurance companies: Allstate Life Insurance Co., Hart-ford Life Insurance Co., New York Life Insurance Company, and Pacific Life andAnnuity Co. Robert Peahl & Michael Miller, Webcast Seminar, Single-Claimant468(B) Trusts, http://web.aig.com/2007/lit6458/lit6458_AIG468(B)%20Presention_v2.PPT (last visited Feb. 19, 2010).324. E-mail from Nacado King to Alfred W. Bodi et al., cc to Kharyne Neptune,Contemporary National Director of Structured Settlements, AIG (Mar. 5, 2005, 09:44AM), available at http://www.settlepro.com/data/AIGSSPolicyMemo.pdf (emphasisadded) (“Our recommended quoting practice is as follows: Our preferred method ofnegotiating a case is to make all offers in the form of a structured settlement. . . .When the case settles for an agreed upon dollar value with the understanding that aportion of the settlement will be placed in a structure, then the broker should place thepremium with AG or AI Life. Unless compelled by the plaintiff or the plaintiff’sbroker to illustrate competitiveness, the broker need not canvas [sic] the ApprovedLife list for the best quote. If compelled, the broker must canvass the Approved Listfor the best available rates. The broker, however, must give AG or AI Life the lastright of refusal.”). It is unclear if the policy is still in effect. The author has spoken tosome in the industry who believe the policy to remain unchanged. Others say thatwhile there may have been historical significance to the memo at one time, there have



market is not fully searched, the claimant can end up with an inferiorlyrated annuity.325

Even if the casualty insurer is not part of a larger insurance com-pany, it can profit by structuring a settlement through the chosen bro-ker. Since 1979, liability insurers have developed relationships withstructured settlement brokers and brokerage companies.326 A liabilityinsurer might almost exclusively hire those particular brokers,327 re-fusing to structure a settlement unless their broker is used.328 In ex-change for this business, it has been reported that brokers will oftenshare their commission on annuity purchases for structured settle-ments with the liability insurer.329

been substantial changes at AIG since. Darer Interview, supra note 227. Therefore, RDarer asserts, those utilizing and relying on the memo are “doing their readers a greatdisservice by implying that the same exists today.” Id. Still, there are casualty insur-ance companies today who strongly push to use affiliate life insurance annuities. Id.But see Ulman E-mail, Feb. 16, 2009, supra note 39 (stating that liability insurers are R“often indifferent” to the identity of the life insurer whose annuity contract funds thesettlement, assuming that the insurer has strong ratings). However, some argue thatthis may not be a problem provided that the affiliated company offers a structuredannuity with a competitive rate-of-return, has a good balance sheet, and can meetplaintiff’s diversification objectives. Darer Interview, supra note 227. Unfortunately, Rcasualty companies sometimes push for the use of an affiliate that does not meet suchneeds. Id.325. McBride E-mail, supra note 322 (saying that a lesser quality annuity will R“often” be the result); Darer Interview, supra note 227 (stating that the use of an Rapproved list will “sometimes” be problematic).326. Risk, Structured Settlements, supra note 19, at 879. R327. Id. A class action against Hartford Financial Services Group alleges that Hart-ford and its approved brokers failed to disclose to claimants that Hartford recapturesbrokerage fees by “secretly bundling the broker’s four percent (4%) commission intothe represented annuity cost. Nor does Hartford reveal that even if a portion of thisfour percent (4%) ‘built-in commission’ is not paid to the Approved Broker or In-House Broker, for whatever reason, it is still kept by Hartford for itself.” Plaintiff’sClass Complaint, supra note 318, at ¶ 44, Doc. 1. Of course, as Hartford argues in its Rmotion to dismiss, plaintiffs do not allege that they received less compensation thanpromised. Defendant’s Motion to Dismiss, 2–3, Doc. 28-3, Spencer, No. 3:05-cv-01681-JCH (Feb. 1, 2006). Their claim, rather, is that Hartford misrepresented thecost of making the promised compensation possible. See id. It has also been reportedthat claimants are sometimes sent a copy of checks made out to life insurance compa-nies, though a portion of those checks will be refunded. Risk, Structured Settlements,supra note 19, at 888. In addition, the factoring industry has alleged that “illegal Rkickbacks and rebates [were given by] structured settlement brokers in exchange fordirecting business to said brokers.” 1999 Hearing, supra note 15, at 29 (statement of RTimothy J. Trankina, Founder and CEO of Peachtree Settlement Funding).328. Grassini E-mail, supra note 322; McBride E-mail, supra note 322. R329. 1999 Hearing, supra note 15, at 29 (statement of Timothy J. Trankina, Founder Rand CEO of Peachtree Settlement Funding).



3. Defendants Can Capture Some of the Tax Subsidy

As noted, the greatest advantage of structured settlements for de-fendants is the ability to pay less.330 The tax subsidy renders struc-tured settlements more valuable to plaintiffs, perhaps by 20% or more,than their cost to defendants.331 However, while it is claimant whowill directly benefit from their increased value, defendant can indi-rectly benefit by demanding a decreased settlement payment.332 De-pending on the size of the reduction in defendant’s cost, the claimantmay reap all, or none, of the tax benefit. While plaintiffs benefit fromthe exclusion,333 defendants do as well.334 Moreover, some observethat defendants leverage their negotiating power, threatening to with-draw the option of a structured settlement in order to benefit fromcontrolling the selection of the structured settlement annuity providerand broker.335 Thus, the subsidy increases the chance of profitingthrough the purchase of the annuity, as described in Part IV.A.2.

B. Defendants’ and Liability Insurers’ Capture May Detract fromthe Subsidy’s Goal

While encouraging the defense to make larger and periodic pay-ments to plaintiffs is consistent with the tax subsidy’s purpose, as do-ing so decreases the likelihood of plaintiffs’ later dependence on thegovernment, reducing defendants’ damages is likely not consistent.336

330. Andrada, supra note 36, at 471–72. R331. E-mail from William L. Neff, Partner, Hogan & Hartson LLP to JeremyBabener, J.D. Candidate, Class of 2010, New York University School of Law (Feb. 6,2009, 11:48:12 EST) (on file with author) [hereinafter Neff E-mail, Feb. 6, 2009](offering a generally used estimate of savings, stating that “the present value of thestream of tax free earnings is approximately 20% higher . . . than developing the samestream of payments if the earnings were taxable”).332. Some refer to this strategy as the “Section 130 veto.” Risk E-mail, supra note303 (noting that he coined the term “to describe the leverage defendants and their Rliability insurers traditionally use to coerce claimants into submitting to structuredsettlements controlled by the tortfeasors or their liability insurers, through intimida-tion by threatening loss of benefit. If the claimant refuses a structured settlement offerby a defendant or its insurer, seeking to have the claimant’s own chosen structuredsettlement producer handle the transaction, the defendant or its insurer often will thentell the claimant that the entire settlement will be paid as a cash lump sum.”).333. See WOOD, TAXATION OF DAMAGE AWARDS, supra note 306, § 7.24. R334. Risk, Structured Settlements, supra note 19, at 872. R335. Risk, A Case, supra note 7, at 673; see Meligan Interview, supra note 31 R(describing how defendants or their casualty insurers will sometimes make one struc-tured settlement offer if plaintiff will agree to using the casualty insurer’s life insur-ance affiliate, and a lower value offer if plaintiff refuses).336. This is not to suggest that it is in the interest of public policy to increase defen-dants’ payments, merely that decreasing defendants’ payments below the value of theharm caused is not, in and of itself, in the interest of public policy.



While this is elaborated upon below, it should also be rememberedthat any augmentation of plaintiffs’ financial ability to cover futureneeds likely furthers the subsidy’s goal.

When considering whether to act in a given way, a logical personwill weigh possible advantages and disadvantages. A tortfeasor em-ployer, for example, considering whether to implement costly safetymeasures, considers the savings and potential damages of that deci-sion. Where the potential damages are slight, such an employer willmore readily disregard safety measures.337 Simply put, “the incentiveto take care will be reduced.”338 For this reason, some argue, “Mak-ing the defendant pay for the full harm is required [to fully achieve]deterrence.”339 The structured settlement tax subsidy, as shownabove, reduces potential damages of tortious actions. One commenta-tor suggests that the structured settlement tax subsidy carries the sameeffect as “a ‘tort reform’ measure that simply provide[s] that the fed-eral government would reimburse tort defendants for 20% of theircosts . . . structures are not actually used to provide plaintiffs withgreater recovery, but to diminish the liability of their injurers.”340 Ofcourse, the reduction in deterrence will impact risk-takers’ actions atthe margins, and it is impossible to know how much. However, increating or maintaining a tax subsidy with the effect of reducing deter-rence, Congress must be sure that the advantages for public policyoutweigh the detriment of reduced deterrence.

337. See generally Gary T. Schwartz, W. Page Keeton Symposium on Tort Law:Mixed Theories of Tort Law: Affirming Both Deterrence and Corrective Justice, 75TEX. L. REV. 1801, 1803 (1997) (noting an “explosion of scholarship analyzing tortlaw in economic terms and emphasizing deterrence as a primary tort objective”) (cit-ing FOUNDATIONS OF TORT LAW (Saul Levmore ed., 1994)).338. Smith, supra note 56, at 1973. R339. Id. at 1973, n.59 (2002) (citing David D. Haddock et al., An Ordinary Eco-nomic Rationale for Extraordinary Legal Sanctions, 78 CAL. L. REV. 1, 44–45(1990)).340. Scales, supra note 2, at 887. One could also analogize to defendants’ ability to Robtain the general deduction available for damages paid to plaintiffs. See Blackburn,supra note 61, at 687 (“If a payor is allowed to deduct damages paid, including costs Rof litigation, then the payor is allowed to spread such costs to the federal governmentand taxpayers. Furthermore, wrongdoers, just as other taxpayers, factor in the after-tax cost of their actions in shaping their behavior. Allowance of deductions for dam-age payments in many instances clearly frustrates public policy.”). Revenue rulingsgo even further, allowing the deduction of punitive damages resulting from the ordi-nary conduct of business. Rev. Rul. 80-211, 1980-2 C.B. 57. Of course, there areexceptions and limitations. See I.R.C. § 162(f) (2006 & Supp. II 2008) (disallowingdeductions for fines and government penalties for violating the law); I.R.C. § 162(g)(2006 & Supp. II 2008) (limiting deductibility of certain antitrust judgments andsettlements).



Two arguments are made positing that defendants’ paying less isnot problematic, or at least not overly so. Some argue that it is “logi-cally unnecessary”341 for defendants to pay exactly what plaintiffs re-ceive because defendants’ costs are irrelevant to a compensatedplaintiff.342 However, the argument incorrectly assumes that plain-tiffs’ monetary compensation is the single driver of personal injurylawsuits.343 In fact, multiple surveys have found that personal injuryclaimants are often pursuing non-monetary goals.344 These includethe seeking of an explanation, an apology, public vindication, or thechance to have one’s side heard and respected.345 Anecdotal evidenceamong personal injury trial attorneys affirms the observation thatmoney is not often claimants’ sole objective.346 The knowledge that adefendant paid for the damage caused may be an end in itself for aplaintiff.

Some commentators also argue that the reduction in defendants’costs can benefit the public at large through reduced insurance premi-ums. Because liability and casualty insurers pay less, they can chargetheir clients less.347 However, this argument ignores the negative im-pact on deterrence discussed in this section. While lower insurancecosts would benefit those paying insurance, it would reduce the disin-centive to take risks. The price of insurance is based on the risk ofcausing harm. Where the tax subsidy decreases the price per unit ofrisk, some individuals will take on risk that profits them less than itcosts society.

Thus, public policy dictates that where possible, and where doingso does not decrease the use of structured settlements, the monetary

341. Joseph M. Dodge, Taxes and Torts, 77 CORNELL L. REV. 143, 172 (1992) (not-ing that a personal injury represents the loss of human capital by plaintiff, without aproportionate gain by defendant, such as in a rescission or unjust enrichment case).342. Derek A. Cave, Structured Settlements: An Alternate Resolution of Claims In-volving Death or Substantial Personal Injury, THE ADVOC. 331, 332 (June–July1979); see Scales, supra note 2, at 888. R343. Scales, supra note 2, at 892. R344. Scales cites multiple sources for this proposition. Id. at 892–93, 893 n.104.345. Id. at 892–93.346. E.g., E-mail from Gail K. Johnson, Senior Trial Counsel, Federal Tort ClaimsAct Section, Department of Justice to Jeremy Babener, J.D. Candidate, Class of 2010,New York University School of Law (Feb. 20, 2009, 13:06:41 EST) (on file withauthor) (noting that while money “is always in the mix and therefore a motivator . . .[and] remains the typical form of ‘apology’ and even punishment . . . the importanceof it varies”).347. Choulos, supra note 21, at 74; see A Roundtable, supra note 10, at 72 (com- Rments of Herb Cumming); BORIS I. BITTKER & LAWRENCE LOKKEN, FEDERAL TAXA-

TION OF INCOME, ESTATES AND GIFTS, 1997 WL 439544, pt. 2, ¶ 13.1, at *5 (2008).



benefits of structured settlements should be directed to claimants,rather than defendants and their liability insurers.

V.THE NEXT STEP AWAY FROM THE TWO TAX

DOCTRINES: QSFS

In response to the defendant and liability insurer tactics describedabove, some plaintiffs make use of a tax entity created by Congress inthe mid-1980s to facilitate mass tort settlements. Consistent with thepublic policy perspective discussed in the previous section, the entity,a “qualified settlement fund,” or QSF, enables a claimant to capture agreater portion of a structured settlement’s benefit, while not discour-aging the use of structured settlements.

By utilizing a QSF, a claimant can control the purchase of theannuity for their structured settlement, capturing some or all of thebenefits of structuring. Claimants can ask a defendant348 to pay alump-sum settlement into the QSF, which acts as a “tax-free way sta-tion,”349 assuming the defendant’s liability through novation. Theclaimant then “negotiates” with a friendly court-appointed QSF ad-ministrator to permanently settle his or her claim through a qualifiedassignment, thereby satisfying the requirements of structured settle-ment tax subsidy eligibility.

However, where there is only one claimant, that claimant argua-bly obtains constructive receipt or economic benefit of the settlementmonies, under a traditional understanding of the two doctrines.350 TheIRS may soon decide whether the control claimants gain through theuse of a single-claimant QSF disqualifies them from eligibility for thestructured settlement tax subsidy.351 The answer is the subject of “araging debate in the tax world.”352

This Article argues that the IRS should apply the constructivereceipt and economic benefit doctrines as it and Congress have ap-plied the two doctrines before in the context of structured settlements:narrowly or not at all. As we will see, the tax subsidy’s purpose re-mains effective, even in the face of such constructive receipt, and is, infact, bolstered.

348. As we will see, claimants can also force defendants to pay an agreed lump-suminto a QSF.349. Robert W. Wood, Qualified Settlement Funds: A Mechanism Whose Time HasCome, L.A. DAILY J., July 12, 2009, at 6 [hereinafter Wood, A Mechanism].350. See Part V.B.351. Infra notes 401–403 and accompanying text. R352. Wood, A Mechanism, supra note 349. R



A. QSFs: More Erosion of Tax Doctine

Section 468B of the Tax Code353 creates a tax entity called a“designated settlement fund,”354 sometimes referred to as a “qualifiedsettlement fund”355 or “QSF.”356 Defendants can make an immedi-ately deductible payment into a QSF, which will eventually be paidout to plaintiffs.357 Thereafter, the fund assumes defendants’ liability,replacing a defendant as the party to the suit or agreement for pur-poses of section 130.358 Thus, the QSF will be able to structure settle-ments with the claimant that will be eligible for the ordinary taxsubsidy.

353. I.R.C. § 468B (2006).354. I.R.C. § 468B(d)(2) (2006).355. While Congress used “designated settlement fund,” I.R.C. § 468B(d)(2) (2006),Treasury used “qualified settlement fund.” Treas. Reg. § 1.468B (1992). Likewise,the IRS has called trusts established pursuant to § 468B “QSFs.” I.R.S. Priv. Ltr. Rul.2001-38-006 (May 7, 2001).356. This Article uses the language of “QSF.” However, it notes some of the differ-ences here. The Tax Code provides that a section 468B fund is “any fund . . . (A)which is established pursuant to a court order and which extinguishes completely thetaxpayer’s tort liability with respect to claims . . . (D) established for the principalpurpose of resolving and satisfying present and future claims against the taxpayer (orany related person or formerly related person) arising out of personal injury, death, orproperty damage.” I.R.C. § 468B(d)(2)(A), (D) (2006) (including other require-ments). QSFs have less restrictions, and thus more flexibility than DSFs. ROBERT W.WOOD, QUALIFIED SETTLEMENT FUNDS AND SECTION 468B, 1-7, (2009) [hereinafterWOOD, QUALIFIED SETTLEMENT FUNDS]; see id. at 13-13. DSFs, for example, onlyoperate for claims of personal injury, death, or property damage. I.R.C.§ 468B(d)(2)(D) (2006). Thus, QSFs are used more frequently than DSFs. WOOD,QUALIFIED SETTLEMENT FUNDS, supra, at 1-8; see id. at 13-3 (“In practice, the QSFhas eclipsed the DSF, making it largely irrelevant.”); Robert W. Wood, Tax Manage-ment Portfolios: Tax Aspects of Settlements and Judgments, 552-3rd, A-75 (BNA)(Oct. 1, 2007) (articulating other differences, which are not necessary to delineate forpurposes of this Article).357. I.R.C. § 468B(a) (2006) (“For purposes of section 461(h), economic perform-ance shall be deemed to occur as qualified payments are made by the taxpayer to adesignated settlement fund.”). Without this language, deductions could only be madeas moneys are received by claimant. I.R.C. § 461(h)(2)(c) (2006 & Supp. II 2008).358. Rev. Proc. 93-34, 1993-2 C.B. 470; I.R.C. § 130(c)(1) (2006). QSFs cannot becreated for worker compensation claims. Treas. Reg. § 1.468B-1(g)(1) (as amendedin 2006). The typical sequence of events to use a QSF involves: (1) either side caninitiate the use of a QSF by hiring an attorney to prepare the documentation, and anadministrator, often the same attorney, (2) that party petitions or moves a trial court,probate court, or government entity to establish a QSF, (3) an order establishing theQSF is entered according to Treas. Reg. § 1.468B-1, (4) a court may be required toapprove the settlement, (5) the administrator creates a bank account subject to thecourt order establishing the QSF and the continuing jurisdiction of that court, (6) thesettlement agreement is signed and the money is transferred, (7) defendants are dis-missed with prejudice, and finally (8) the QSF and plaintiff establish a settlement withcourt approval. Qualified Settlement Fund Sequence, http://www.risklawfirm.com/files/QSFSequence10-12-04.pdf (2004).



Enacted in 1986,359 the QSF grew out of mass tort settlements,360

and has been used for that purpose.361 Section 468B was legislated tomake settlement payments to a personal injury class immediately de-ductible for defendants.362 Though the amount defendant will eventu-ally pay to a plaintiff class may be known, plaintiffs within the classmay not yet have allocated the money amongst themselves. Section468B allows a defendant to make an immediately deductible settle-ment into a QSF,363 and extricate itself from the lawsuit via a dismis-sal with prejudice.364 Thereafter, the QSF is taxed as a person,365 andthe appointed QSF administrator is in control of distributing the QSFmonies.366 Because a QSF allows the transfer of monies into a fundwithout the beneficiaries of that fund receiving the income for tax pur-poses, the authoritative treatise on QSFs describes them as “a simpletrust that essentially abrogates the fundamental tax concepts of con-structive receipt and economic benefit that go to the root of our federalincome tax system.”367

Under Treasury regulations issued in 1993, a QSF is establishedpursuant to an order by a court or government entity to satisfy tortiousclaims,368 and is subject to that entity’s continuing jurisdiction.369

359. Tax Reform Act of 1986, Pub. L. No. 99-514, § 1807(a)(7)(A), 100 Stat. 2085(1986).360. Letter from Dewey Ballentine LLP to Gregory F. Jenner, Deputy Assistant Sec-retary for Tax Policy, Department of Treasury, et al. 1 (Oct. 8, 2003), available athttp://www.risklawfirm.com/files/DeweyBallentineltrtoSenBaucus06-29-04.pdf (au-thored by Stuart Odell, and Joseph K. Dowley, Former Chief Counsel of the U.S.House Committee on Ways & Means (1985–1987), representing The Pension Com-pany) [hereinafter Dewey Ballentine Letter]; see William L. Winslow, ResolvingMass Torts with Designated Settlement Funds, 30 TRIAL 82, 82 (1994) (“special pur-pose funds primarily grew out of asbestos cases and other toxic tort litigation”).361. Winslow, supra note 360, at 82. In the early 1990s, QSFs were used almost Rexclusively for large class actions. WOOD, QUALIFIED SETTLEMENT FUNDS, supranote 356, at 1-4. R362. See Winslow, supra note 360, at 84. R363. I.R.C. § 468B(a) (2006). The earlier a deduction can be made, the more valua-ble it is to the taxpayer.364. WOOD, QUALIFIED SETTLEMENT FUNDS, supra note 356, at 1-21. The QSF as- Rsumes the defendant’s liability through novation. E.g., Order Establishing the Enri-quez Settlement Trust and Appointing Administrator, No. 06-CA-242-11-L, i (Fla.Cir. Ct. Seminole Cty. 2008).365. Treas. Reg. § 1.468B-2(b)(1) (as amended in 1993); WOOD, QUALIFIED SETTLE-

MENT FUNDS, supra note 356, at 1-6. R366. Though the court has continuing jurisdiction, in most cases, judges rubber-stamp distributions. See WOOD, QUALIFIED SETTLEMENT FUNDS, supra note 356, at Rviii, 2-6.367. Id. at vii. Where there are many parties arguing over the monies in a QSF, thetwo doctrines may not be triggered.368. Treas. Reg. § 1.468B-1(c)(2) (as amended in 2006). Other types of claims, suchas breach of contract, are also acceptable.



Pursuant to 1993 Treasury procedure, section 130 qualified assign-ments can be made by QSFs for purposes of structured settlement taxsubsidy eligibility because they replace the original defendant as theparty to the suit or agreement for purposes of section 130.370

B. Capturing More Benefits Through a Single-Claimant371 QSF

Soon after the Treasury issued the procedure allowing QSFs toproduce subsidy-qualifying structured settlements, the most commonQSF question became, “How many plaintiffs must participate in thecompromise in order to use a designated settlement fund?”372 Thoughthe defense industry lobbied for section 468B’s regulatory frameworkin the context of mass torts,373 some plaintiff lawyers and brokershave used the entity for entirely different purposes, sometimes as a“weapon.”374 In order to prevent defendants and their insurers frommonopolizing structured settlement negotiations and structured settle-ment benefits,375 plaintiff attorneys argue, plaintiffs in single-plaintiff

369. Id.370. Rev. Proc. 93-34, 1993-2 C.B. 470. See generally I.R.C. § 130(c)(1) (2006).Before 1993, it was believed that QSFs could not use section 130 qualified assign-ments. Dewey Ballentine Letter, supra note 360, attached memo at 2. R371. Many do not distinguish between single-claimant QSFs and those with severalrelated claimants. Wood, TAX NOTES, supra note 45, at 74; Dewey Ballentine Letter, Rsupra note 360, at 2 n.1 (“For the purposes of this discussion, multiple-claimant situa- Rtions where settlement amounts between the defendant and each claimant have beendetermined prior to any payment by the defendant should be considered equivalent tosingle-claimant situations.”); Dewey Ballentine Letter, supra note 360, attached Rmemo at 3 n.7. In truth, it is not clear what constitutes a single-claimant controversy.WOOD, QUALIFIED SETTLEMENT FUNDS, supra note 356, at 2-40. Thus, plaintiff attor- Rneys are advised to draft complaints with alternative claims, adding other parties whenpossible. Id.; HINDERT ET AL., supra note 90, § 3.08B[7] (stating that some argue that RMedicare and Medicaid liens “constitute separate and additional claims for purposesof 468B funds”). QSFs established with a single injured party and multiple liens orclaims are sometimes called “single party” QSFs.372. Winslow, supra note 360, at 83. R373. NSSTA was the “principal proponent of the issuance of Rev. Proc. 93-34.”NSSTA Letter, supra note 14, at 8. R374. E-mail from Michael Russell, Attorney, Garretson Firm Resolution Group, Inc.to Jeremy Babener, J.D. Candidate, Class of 2010, New York University School ofLaw (Apr. 20, 2009, 12:18:52 EST) (on file with author), [hereinafter Russell E-mail](noting that QSFs are also frequently used as a “weapon” to get a defendant out of thestructured settlement process); Darer Interview, supra note 227 (noting that some use RQSFs as a “threat during negotiations”). Some plaintiff attorneys will only use theQSF if forced to. Grassini E-mail, supra note 322 (noting the appropriateness of Rusing a QSF where the liability insurer refuses to structure a settlement without usingits inadequate list of insurance companies or chosen broker).375. See Continental Casualty v. United States, No. C 02-4891 VRW, C 02-5292VRW, slip op., 2006 WL 3455055, at *1 (N.D. Cal. Nov. 29, 2006) (amended order)(“Plaintiffs also seek a court order establishing a qualified settlement trust . . . presum-



settlements can direct the defendants or their liability insurers to pay alump-sum into a QSF.376 Thereafter, plaintiffs can discuss how to set-tle the claim with the QSF administrator in a non-adversarial con-text,377 arranging for the purchase of an annuity through their ownchosen representatives. Some estimate that between 30% to 40% ofstructured settlement brokers, or 5% of the industry, use single-claim-ant QSFs.378

While a QSF transfers control over the structuring of a settlementto a plaintiff, a defendant might demand to pay a lower lump-sum,predicting that a plaintiff will benefit from structuring soon after. If

ably to bypass the DOJ requirements and privately create a structured paymentplan.”); Meligan Interview, supra note 31 (noting that he may use a QSF to prevent Rdefendant from profiting from the structured settlement, or being involved in planningplaintiff’s future). Of course, the use of a QSF must be balanced with its costs. Thecreation of a QSF is more complicated than a simple structured settlement. Also, theircreation will typically cost between $3,000 and $5,000. Darer Interview, supra note227. R376. Risk, Structured Settlements, supra note 19, at 892 (“plaintiffs can take control Rof the structured settlement process through a QSF and leave the defense out of thepicture once the money has been paid into the fund”).377. Id. at 893; Risk, A Case, supra note 7, at 657 (noting that selection of the QSF Radministrator is normally subject to claimant approval).378. Darer Interview, supra note 227. Most life insurance companies will sell annui- Rties to single party QSFs on a case-by-case basis. McBride E-mail, supra note 322; Re.g., E-mail from Toni Griffin, Director of Public Relations, MetLife, to JeremyBabener, J.D. Candidate, Class of 2010, New York University School of Law (Mar. 8,2009, 10:36:02 EST) (on file with author) (discussing MetLife’s policy). But seeRisk, Structured Settlements, supra note 19, at 895 (noting that very few life insur- Rance companies will sell to single-claimant QSFs). Portions of a 2001 internal memoby John Hancock tax attorneys were published in a 2001 law article, delivering theopinion that the use of a QSF does not constitute constructive receipt “merely because[the claimant] is the single claimant.” Risk, Structured Settlements, supra note 19, R896 n.160 (quoting Memorandum from Otto J. Preikszas, Jr. Counsel, John Hancock,to Christi Fried, Director of Structured Settlement (Feb. 24, 2000) (on file with au-thor)). Those companies that do accept single-claimant QSFs on a case-by-case basistypically require a showing of more than one claim. McBride E-mail, supra note 322. RHowever, the true single-claimant case is rare, or even nonexistent. E-mail from JohnStaunton, Elder Law Attorney and QSF Administrator, to Jeremy Babener, J.D. Can-didate, Class of 2010, New York University School of Law. (Apr. 20, 2009, 17:25:22EST) (on file with author) [hereinafter Staunton E-mail]; McBride E-mail, supra note322. Practitioners observe that there is always some issue that can be “fairly charac- Rterized” as an additional claim. Staunton E-mail, supra; see also McBride E-mail,supra note 322 (noting that any case can be characterized as a multiple-claimant case Ras a result of possible Medicare future interests). These are often Medicaid or Medi-care liens, sometimes being “potential claim[s].” Staunton E-mail, supra; see alsoMcBride E-mail, supra note 322; Russell E-mail, supra note 374 (observing that Rsome attorneys use potential claims to constitute multiple claims). Some firms thatact as QSF administrators will not accept QSF single party cases unless obligationsthat could constitute other claimants exist. Id. (noting that his firm will work hard toestablish that multiple-claimants exist).



done, plaintiff would be less capable of capturing the benefits of astructured settlement. Once defendants have agreed to a lump-sumsettlement payment, however, the use of a QSF, and a structured set-tlement thereafter, is not necessarily preventable. Though some casu-alty companies refuse to participate in single-claimant QSFs,379 courtscan and have ordered defendants to pay into a QSF even where notstipulated by a settlement.380 In addition, plaintiffs can and sometimesdo attempt to avoid defendants’ knowledge of a QSF’s use.381 Thereare two steps that plaintiffs can take to guard against defendants learn-ing of a QSF’s use:382 creating the QSF out-of-state,383 and not di-recting defendants to pay to a QSF.

379. HINDERT ET AL., supra note 90, § 3.08B[7]. Liability insurers sometimes op- Rpose the use of QSFs because they wish to benefit from controlling the structuring ofa settlement. McBride E-mail, supra note 322. R380. One commentator argues that plaintiffs cannot force defendants to pay into aQSF. HINDERT ET AL., supra note 90, § 3.08B[7] (citing Continental Casualty v. RUnited States, No. C 02-4891 VRW, C 02-5292 VRW, slip op., 2006 WL 3455055(N.D. Cal. Nov. 29, 2006) (amended order)). Hindert correctly points to ContinentalCasualty v. United States, where a district court refused to create a QSF becauseplaintiffs could cite only to regulations, rather than law, empowering the court to doso. Continental Casualty v. United States, No. C 02-4891 VRW, C 02-5292 VRW,2006 WL 3455055, at *3 (N.D. Cal. Nov. 29, 2006) (amended order) (“As a court oflimited jurisdiction this court may not create a qualified settlement account merelybecause a tax regulation allows the creation of such settlement accounts. Rather,plaintiffs must identify some constitutional or congressional grant of authority provid-ing this court with jurisdiction to create unilaterally qualified settlement accounts.”).Thereafter, the court delineated a way that such a QSF could be used with defendant’sconsent. Id. However, other plaintiffs have persuaded courts to order defendants topay previously agreed settlement amounts into QSFs. Order Granting Motion for Ex-pedited Relief, No. Civ. 06-1153 MCA/WDS (D.N.M. Jan. 17, 2008). Such courtshave, in the past, immunized defendants from liability in the event that funds depos-ited into a QSF are found to be taxable. E.g., id. at l. It appears that some companiesare attempting to prevent such a court order by recommending that their settlementsspecifically disallow the use of QSFs. Peahl & Miller, supra note 323, at 19 (“The Rparties agree that the proceeds shall not be payable into a qualified settlement fund(‘QSF’), as defined by 26 U.S.C. § 468B or 26 C.F.R. § 1.468B-1(c)(1). No partyshall either agree to or seek to obtain a consent or other court order to have anyportion of the proceeds placed into a QSF at any time.”).381. Risk E-mail, supra note 303 (stating that he created this tactic and has used it in Rmultiple cases, though declining to describe exactly how).382. Some in the industry believe that defendants will eventually discover the QSFthrough the use of a court order. Darer Interview, supra note 227; Neff E-mail, Feb. R6, 2009, supra note 331. However, as the following text shows, this is not necessarily Rtrue. Moreover, even if it was, the defendant might not be able to prevent their pay-ment from being entered into and distributed by a QSF anyway. See supra note 381 Rand accompanying text.383. The QSF could also be created in the same state, but in a jurisdiction other thanwhere the claim for damages was prosecuted, such as in a probate court that is han-dling the recovery of damages on the behalf of a minor.



First, plaintiffs can establish a QSF outside of a defendant’s pur-view. Regulations do not require that QSFs be created in the sameproceedings, the same court,384 or even the same state as the tort ac-tion.385 For example, a Florida state court created a QSF for a per-sonal injury action filed in a district court in New Mexico.386 TheFlorida court held that its broad authority as a court of general juris-diction was sufficient to create the QSF.387 In fact, the only otherparty Treas. Reg. § 1.468B-1 forces plaintiff to involve is a state en-tity,388 which orders and continues to exercise jurisdiction over thefund.389 This entity could be “the United States, any state . . . terri-tory, possession, or political subdivision thereof, or any agency or in-strumentality (including a court of law) of any of the foregoing.”390

As the treatise on QSFs puts it, “Virtually any federal or state govern-mental authority willing to do so may order, approve, and takecontinuing jurisdiction over a QSF.”391 However, QSFs are typicallycreated by courts.392 By creating the QSF in a faraway jurisdiction,the plaintiff makes it unlikely that the defendant will learn of its exis-tence or use.

Second, plaintiff can direct defendant to pay the lump-sum settle-ment to a name not typically associated with a QSF. Regulations donot require that defendants’ checks be made out to a QSF in order forthe monies to be deposited therein.393 In fact, some courts have cre-ated QSFs and ordered that settlement monies paid by defendants toplaintiffs’ attorneys be directed into the QSF “regardless of the named

384. WOOD, QUALIFIED SETTLEMENT FUNDS, supra note 356, at 1-9, 2-6. R385. See Treas. Reg. § 1.468B-1 (as amended in 2006).386. See Order Establishing the Nunez Segregated Account and Appointing Admin-istrator, No. 2007-538, 250, 4 (County Court at Law No. 3 of Lubbock County, Texas,Oct. 31, 2007).387. Id. (also holding the venue to be “proper”); Order Granting Motion for Expe-dited Relief, No. Civ. 06-1153 MCA/WDS, Conclusions of Law 4-5 (D.N.M. Jan. 17,2008) (holding the Texas court to have competent jurisdiction, and ordering defen-dants to pay into the created QSF).388. Practitioners note that judges sometimes want the defense to be involved in thecreation of a QSF. Russell E-mail, supra note 374. R389. See Treas. Reg. § 1.468B-1 (as amended in 2006). A QSF can be created in astate court while the litigation is in federal court, or by probate, bankruptcy, or admin-istrative-type courts. WOOD, QUALIFIED SETTLEMENT FUNDS, supra note 356, at 2-6. RIt can also be created by an arbitration award. Id. 2-7.390. Treas. Reg. § 1.468B-1 (as amended in 2006).391. WOOD, QUALIFIED SETTLEMENT FUNDS, supra note 356, at 1-9 (citing Treas. RReg. § 1.468B-1(c)(1)).392. Id. at 1-11, 2-5.393. See Treas. Reg. § 1.468B-1 (as amended in 2006).



payee.”394 As courts typically order the establishment of a QSF usinga plaintiff’s proposed order verbatim it is not likely difficult to securesuch language.395 If the plaintiff can arrange for such a court order,the defendant may never learn of the QSF’s existence or use.396

C. Ending the Debate Over Single-Claimant Section 468B Funds

The use of single-claimant QSFs is limited by the Treasury’s am-biguous position regarding the eligibility of single-claimant QSF pay-ments for the structured settlement subsidy. An increased use ofsingle-claimant QSFs, which would direct structured settlement bene-fits away from defendants397 and toward plaintiffs, would likely resultfrom Treasury regulations holding that single-claimant QSFs canmake use of structured settlements in the same way as multiple-claim-ant QSFs. Plaintiffs would therefore likely benefit from regulationsformally stating that single-claimant QSF structured settlement pay-ments are eligible for the ordinary structured settlement subsidy. AsPart IV.B argued, it is in the interest of public policy to direct thebenefits of structuring a settlement away from defendants and theirliability insurers, and toward plaintiffs, so long as it does not decreasethe number or value of structured settlements. This both maintains theinfluence of deterrence and augments plaintiffs’ ability to cover theirfuture financial needs.

While it is possible to argue that existing statutory, regulatory,and case law implicitly establish this rule, an explicit statement fromthe Treasury would prevent those considering the use of single-claim-ant QSFs from abstaining due to ambiguity.398 The Treasury main-tained the issue as an item in its Priority Guidance Plan from 2004

394. Order Establishing the Nunez Segregated Account and Appointing Administra-tor, No. 2007-538, 250, d (County Court at Law No. 3 of Lubbock County, Texas,Oct. 31, 2007); Order Establishing the Enriquez Settlement Trust and Appointing Ad-ministrator, No. 06-CA-242-11-L, d (Fla. Cir. Ct. Seminole Cty. 2008).395. McBride E-mail, supra note 322 (noting that courts may involve defendants if Rthey oppose creation of the QSF).396. No law or regulation prevents the use of such a strategy. Russell E-mail, supranote 374. However, some view the strategy as “not quite legitimate and bad busi- Rness.” Id. The same practitioner does note that it might be a “credible option” wherethe defendant insists on a lump-sum payment. Id.397. Even some commentators who disagree that defendants regularly minimizecosts via structured settlements believe that the use of a QSF to be “inherently supe-rior to structuring with a defendant.” Hindert E-mail, Aug. 17, 2009, supra note 302. RIn addition, such proponents of QSFs argue that they are better for defendants becausethey eliminate defendants’ “potential future liabilities.” Id.398. Wood, A Mechanism, supra note 349 (“Although the statute itself seems to Rsuggest that even a single-claimant QSF should work, it is best to steer clear of thiscontroversy until it is resolved.”).



through 2009.399 While the issue is not currently in the Plan,400 it isnot likely closed.401 Throughout this time, proponents and opponentsof the rule have made recommendations to the Treasury.402 Internaldisagreement in the government has been reported,403 and though a2001 article found the issue “clear and unambiguous,”404 there is alsoconsiderable disagreement in the structured settlement industry.405

Moreover, it has been reported that some in the insurance industryhave urged the Treasury not to issue guidance on the subject at all, so

399. DEPARTMENT OF THE TREASURY, 2008–2009 PRIORITY GUIDANCE PLAN 19(2008), available at http://www.irs.gov/pub/irs-il/2008-2009pgp.pdf; Third QuarterlyUpdate of the 2003–2004 Priority Guidance Plan, Department of the Treasury 23(Apr. 23, 2004), available at http://www.irs.gov/pub/irs-utl/2003-2004_pgp.pdf. Asof 2008, it was reported that Treasury guidance “will not promptly be forthcoming.”HINDERT ET AL., supra note 90, § 3.08B[5] (citing NSSTA Letter to Members (July R23, 2004)). It has been written that the delay “has been due to diversions caused by theneed for tax rulings on relief funds for natural disasters such as the recent hurricanes,floods and a tsunami, plus the departure of several key people from Treasury and theIRS.” Risk, Attorney Comments, supra note 225. However, the same commentator Rhas received reports “that the issuance of published guidance on the use of QSFsestablished for the benefit of a single claimant . . . is near.” Id.400. DEPARTMENT OF THE TREASURY, 2008–2009 PRIORITY GUIDANCE PLAN 19(2008), available at http://www.irs.gov/pub/irs-utl/2009_-_2010_priority_guidance_plan.pdf.401. See generally Jeremy Babener, Treasury Decides to Pass on Single-ClaimantQualified Settlement Fund Guidance for Now, N.C. L. WKLY., Dec. 14, 2009, at 14.402. Letter from Skadden, Arps, Slate, Meagher, & Flom LLP to Pamela F. Olson,Assistant Secretary (Tax Policy), Department of Treasury, and B. John Williams,Chief Counsel, IRS, http://www.risklawfirm.com/files/Section130-BasicSkaddenLtrwithatch7-7-03.pdf (June 19, 2003) [hereinafter Skadden Letter] (authored by FredGoldberg, Former Chief Counsel, IRS (1984–1986), Former Commissioner, IRS(1989–1992), Former Assistant Secretary of the Treasury for Tax Policy (1992), Ken-neth Gideon, Former Chief Counsel, IRS (1981–1983), Former Assistant Secretary ofthe Treasury for Tax Policy (1989–1992), and Jody Brewster, Former Assistant ChiefCounsel (Income Tax & Accounting, 1994–1999)); Dewey Ballentine Letter, supranote 360; NSSTA Letter, supra note 14. R403. Risk, A Case, supra note 7, at 645; Risk, Structured Settlements, supra note 19, Rat 896 n.156; Neff E-mail, Feb. 6, 2009, supra note 331. R404. Risk, Structured Settlements, supra note 19, at 894–95. R405. See Skadden Letter, supra note 402; Dewey Ballentine Letter, supra note 360; RNSSTA Letter, supra note 14; ROBERT PEAHL & MICHAEL MILLER, SINGLE-CLAIM- RANT 468(B) TRUSTS (2007), http://web.aig.com/2007/lit6458/lit6458_AIG468(B)%20Presention_v2.PPT. Robert W. Wood, the author of Qualified Settlement Funds andSection 468B, writes, “The Regulations seem to allow the possibility of a singleclaimant QSF.” WOOD, QUALIFIED SETTLEMENT FUNDS, supra note 356, at 1-26. RHowever, he recommends that the use of single-claimant QSFs be avoided because ofthe uncertain application of the constructive receipt and economic benefit doctrines.See id. at 2-40. It is unclear if the economic benefit doctrine applies. Id. at 2-54.NSSTA has argued since 1997 that the use of a QSF triggers economic benefit insingle-claimant cases. Risk, Structured Settlements, supra note 19, at 896 (citation Romitted); id. at 896 n.157.



as to maintain uncertainty.406 Although the Treasury has not taken aclear position, there is some evidence suggesting that it favors the po-sition of single-claimant QSF proponents.407

Those making the case that single-claimant QSFs should not becapable of accessing the structured settlement tax subsidy make fourarguments: (1) that the legislation and regulatory structure allowingQSFs was not intended for single-claimant cases, (2) that the use of asingle-claimant QSF constitutes economic benefit, (3) that allowingsingle-claimants to use QSFs will counteract Congress’s intention toencourage structured settlements, and (4) that allowing single-claim-ants to use QSFs will lead to abuses of section 468B. As will beshown, the first two arguments have merit, though are ultimately un-persuasive, while the latter two arguments likely fail outright. As pre-viously discussed, the shifting of structured settlement benefits awayfrom defendants is in the interest of public policy. Thus, the Treasuryshould issue guidance or regulations holding that single-claimantQSFs can use qualified assignments to structure settlements, accessingthe subsidy, in the same manner as multiple-claimant QSFs.

There is significant evidence that section 468B and its regulatoryframework were intended for multiple-claimant cases. As noted, sec-tion 468B was legislated in the context of mass torts.408 It appearsthat the regulatory language that proponents of single-claimant QSFscite,409 requiring that section 468B funds be “established to resolve orsatisfy one or more contested or uncontested claims,”410 was issued inresponse to a mass tort related request.411 Moreover, NSSTA success-

406. Risk, A Case, supra note 7, at 679–80. R407. The Chief of the IRS Income Tax and Accounting Division, which is the branchassigned the issuance of the relevant regulation, has been cited as confirming “thateconomic benefit does not automatically occur simply because a QSF is establishedultimately for the benefit of a single plaintiff.” Risk, Attorney Comments, supra note225 (citing Jeffery G. Mitchell, Branch Chief, I.R.S. Income Tax & Accounting Divi- Rsion, Address at a seminar sponsored by the Society of Settlement Planners (March 9,2006)). In addition, the IRS held in a non-binding ruling that moneys transferred intofour identical single-beneficiary QSFs would not constitute taxable income to the ben-eficiaries of the funds. I.R.S. Priv. Ltr. Rul. 97-36-032 (Sept. 5, 1997) (entirely ignor-ing the question of economic benefit).408. See Winslow, supra note 360, at 84. R409. Risk, Structured Settlements, supra note 19, at 895. R410. Treas. Reg. § 1.468B-1(c)(2) (as amended in 2006) (emphasis added).411. T.D. 8459, 1993-8 I.R.B. 6 (1992) (“One commentator requested that the finalregulations clarify whether all potential claims must be asserted before a fund, ac-count, or trust satisfies the requirement of § 1.468B-1(c)(2). In response to this com-ment, the final regulations clarify that even a single claim satisfies this requirement.”).Thus, opponents argue that the “one or more” language is meant to allow a QSF to becreated for a single, though soon-to-be joined, member of a plaintiff class. NSSTALetter, supra note 14, at 9. R



fully lobbied for Rev. Proc. 93-34 specifically to use section 130 qual-ified assignments in mass tort cases.412 Thus, opponents of single-claimant QSFs argue, use of section 468B for single-claimant cases ismisuse.413

However, these intent arguments face three substantive deficien-cies. First, even if the original intent of section 468B and the accom-panying regulatory framework related to mass tort cases, noprohibition exists against existing law applying to evolving practicesand purposes.414 Secondly, the regulatory “one or more”415 languagecited by proponents of single-claimant QSFs416 suggests that the Trea-sury was aware that permanently single-claimant QSFs might fol-low.417 After all, the first plaintiff of a class, having requested thecreation of a QSF, might never be joined by other plaintiffs.418 Andthird, though Treasury regulations disallow many particular liabilitiesfrom QSF use, such as worker’s compensation claims, single-claimantcases are not in that list.419 Thus, proponents of single-claimant QSFsargue, QSFs with any number of claimants can be created withoutviolating section 468B and its regulatory framework.420

Those opposed to single-claimant QSFs argue that the economicbenefit doctrine applies and is triggered by single-claimant QSF trans-fers, necessitating a different tax treatment than for multiple-claimantQSFs.421 Technically, there is no “express override”422 of the eco-

412. See id. at 9 (“In the individual tort claimant situation, there was no such needfor guidance because the defendant (or its liability carrier) making the section 130qualified assignment clearly was ‘a party to the suit or agreement’ under Code130(c)(1), and hence the claimant in an individual tort situation clearly could availhimself or herself of the section 130 periodic payment mechanism already.”); DeweyBallentine Letter, supra note 360, at 2 (“The sole purpose of Rev. Proc. 93-34 was to Rpermit qualified assignments from section 468B trusts in mass tort situations where atrust is needed to accept defendant’s settlement payment and to administer the fundsuntil the individual claims are resolved. . . . Rev. Proc. 93-34 was not written toaddress situations in which a single claimant is involved.”); Dyer Interview, supranote 53. R413. See Dewey Ballentine Letter, supra note 360, at 1–2; NSSTA Letter, supra Rnote 14, at 12. R414. It could be argued that such an action would contradict American notions ofdemocracy; however, the Treasury has discretion to regulate.415. Treas. Reg. § 1.468B-1(c)(2) (as amended in 2006).416. Risk, Structured Settlements, supra note 19, at 895. R417. Even assuming that the “one or more” language was meant to directly respondto a mass tort related comment request, the explanation stated, “the final regulationsclarify that even a single claim satisfies.” T.D. 8459, 1993-8 I.R.B. 5.418. See Risk, A Case, supra note 7, at 659 (providing a hypothetical of a building Rfire where only one victim is identified).419. Treas. Reg. § 1.468B-1(g) (as amended in 2006).420. See, e.g., Risk, Structured Settlements, supra note 19, at 895. R421. Dewey Ballentine Letter, supra note 360, attached memo at 3. R



nomic benefit doctrine in the Tax Code or regulations for section130.423 In fact, the IRS has applied the economic benefit doctrine testin at least one section 468B trust case.424 Moreover, the IRS hasfound the economic benefit doctrine to be triggered where personalinjury defendant monies are paid into court ordered trusts for holdingand future distribution by a “nonadverse party.”425 Lastly, if a claim-ant does receive the economic benefit of monies in a QSF, it would beupon the defendant’s novation, and prior to any qualified assignment,which may be exempted from the economic benefit doctrine. Thus,opponents of single-claimant QSFs argue, the economic benefit doc-trine applies to transfers of defendant monies to QSFs in single-claim-ant cases.426

However, there is substantial reason to doubt that the economicbenefit doctrine applies to such transfers. First, with respect to thecases presented in the preceding paragraph, neither involved section130. The economic benefit doctrine arguably does not apply to sec-tion 130(c).427 The IRS has held that the 1988 amendment428 to sec-tion 130(c) “was intended to allow assignments of periodic paymentobligations without regard to whether the recipient has the current ec-onomic benefit of the sum required to produce the periodic pay-ments.”429 Thus, it is argued that Congress did not intend for thedoctrine to apply to single-claimant QSFs using section 130 to struc-tured settlements.430 And, in fact, the IRS has previously held thatmoney transfers into four QSFs, each with a single beneficiary, did notconstitute taxable income to the beneficiaries.431

422. Id.423. Id.424. I.R.S. Priv. Ltr. Rul. 2001-38-006 (Sept. 21, 2001) (finding that the doctrine ofeconomic benefit was not triggered by the use of a section 468B trust).425. Rev. Rul. 83-25, 1983-1 C.B. 116. Opponents of single-claimant QSFs alsopoint to an IRS determination that personal injury defendant monies used, pursuant toa court order, to purchase five-year certificates of deposit at a savings and loan associ-ation in plaintiff’s name, were taxable to plaintiff. Rev. Rul. 76-133, 1976-1 C.B. 34.426. Dewey Ballentine Letter, supra note 360, attached memo at 3. R427. See Risk, Structured Settlements, supra note 19, at 895. R428. Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647,§ 6079, 102 Stat. 3709 (1988).429. I.R.S. Priv. Ltr. Rul. 97-03-038 (Jan. 1, 1997).430. See Risk, A Case, supra note 7, at 645 (“Congress did not intend for the judicial Rdoctrine of economic benefit to apply to the facts of a designated settlement fund orqualified settlement fund for the benefit of a single claimant.”).431. I.R.S. Priv. Ltr. Rul. 97-36-032 (Sept. 5, 1997) (ignoring entirely the questionof economic benefit); Risk, Attorney Comments, supra note 225 (“Obviously, the IRS Rfound that economic benefit did not attach simply because the QSF was establishedfor the benefit of a sole individual.”) (citing I.R.S. Priv. Ltr. Rul. 97-36-032 (Sept. 5,1997)); see also I.R.S. Priv. Ltr. Rul. 2001-38-006 (May 7, 2001) (stating that in the



In addition, section 486B of the Treasury regulations states,“Whether a distribution to a claimant is includible in the claimant’sgross income is generally determined by reference to the claim in re-spect of which the distribution is made and as if the distribution weremade directly by the transferor.”432 Though this may well have beenwritten to secure excludability of claims covered by section 104(a)(2),the “as if” language could be interpreted to suggest that the economicbenefit doctrine should apply to the QSF distribution in the same wayit applies to qualified assignments, i.e., it would not apply.433 Lastly,section 468B Treasury regulations also state that money transfers toQSFs to satisfy a liability are generally not included in gross in-come.434 Thus, it seems doubtful that the economic benefit doctrineapplies to section 468B claimants structuring their settlements undersection 130.435

context of a QSF-related decision, “In order for a taxpayer to include an amount inincome under the economic benefit doctrine, the amount must be set aside irrevoca-bly, for the taxpayer’s sole benefit, without restrictions or conditions based upon theoccurrence of future events.”). It is noteworthy that in Private Letter Ruling 2001-38-006, while the IRS cited reasons why the transfer of monies into a QSF with multiplepossible beneficiaries would not constitute economic benefit to such beneficiaries, theIRS failed to list the future occurrence of the settlement between the beneficiaries andthe QSF as one of the possible “future events.” I.R.S. Priv. Ltr. Rul. 2001-38-006.Thus, in the single-claimant QSF scenario, the fact that there must be a settlementbetween the claimant and QSF might not constitute a “future event” that would pre-vent the claimant from receiving the economic benefit of monies transferred into therelevant QSF. It is important to recognize that, except pursuant to regulations, privateletter rulings cannot be used or cited as precedent. I.R.C. § 6110(k)(3) (2006) (Sept.21, 2001). However, the Supreme Court has stated that, “although the petitioners arenot entitled to rely upon unpublished private letter rulings which were not issuedspecifically to them, such rulings do reveal the interpretation put upon the statute bythe agency charged with the responsibility of administering the revenue laws.” Hano-ver Bank v. Comm’r, 396 U.S. 672, 686 (1962) (using a private letter ruling as evi-dence of a particular interpretation’s validity).432. Treas. Reg. § 1.468B-4 (1992) (emphasis added) (providing, as an example,that if the claim is for a personal injury, it would be excludable under section104(a)(2)).433. Nevertheless, opponents argue that even if section 130’s economic benefit im-munity is extended to section 468B fund distributions, the doctrine is still triggered bythe transfer from the defendant to the fund. See NSSTA Letter, supra note 14, at 7 R(“The lump sum payment by the defendant has come to rest in the trust in which all ofthe interests have merged in the claimant and over which the claimant has investmentcontrol, before an assignment can ever be made.”).434. Treas. Reg. § 1.468B-2 (as amended in 1993).435. One could argue that because a single-claimant QSF administrator is a non-adverse party to the claimant, the claimant has control and thus constructive receipt ofthe monies within a QSF. However, constructive receipt violation arguments facesimilar deficiencies to economic benefit arguments, see Part III.D. (observing the non-application of the constructive receipt doctrine to structured settlements), though theyare not frequently made. Risk, Attorney Comments, supra note 225 (“Constructive R



If the economic benefit doctrine is held to apply to single-clam-ant QSFs, it may be triggered when a defendant transfers a lump-sumpayment to a single-claimant QSF.436 It is argued that monies paidinto a single-claimant QSF are no different than a lump-sum paymentmade directly to claimant.437 Such arguments highlight the lack ofadverse interest or material limitation on the QSF funds.438

If the economic benefit doctrine were found to apply, this argu-ment would be persuasive.439 Though proponents of single-claimant

receipt has not been raised as an issue in whether a single-claimant QSF can make aqualified assignment.”). In addition, while a QSF administrator is a non-adverseparty, they are still legally independent of the claimant, having taken a defendant’splace through novation. Thus, the claimant does not truly control the QSF monies.436. Dewey Ballentine Letter, supra note 360, attached memo at 3. R437. NSSTA Letter, supra note 14, at 6. R438. Id. at 6; Dewey Ballentine Letter, supra note 360, at 3. Proponents of single- Rclaimant QSFs argue, “[A]s long as the QSF is established and operated according toTreasury Regulations to ‘resolve or satisfy’ the claim or claims, there must be a futureevent (the settlement with the QSF), and that [sic] blocks the claimant from havingeconomic benefit in the QSF’s assets.” Risk, Attorney Comments, supra note 225. RLikewise, they point to a previously cited decision defining the triggering elements foreconomic benefit; money must be placed in an irrevocable fund beyond the reach ofthe transferring party, in which the beneficiary has vested rights with receipt condi-tioned only on the passage of time. Thomas v. United States, 45 F. Supp. 2d 618, 620(1999) (citing Sproul v. Comm’r, 16 T.C. 244 (1951)), aff’d, 194 F.2d 541 (6th Cir.1952)). However, a QSF clearly is a fund. It is irrevocable. The question is whetherit is beyond the reach of a defendant’s or liability insurer’s creditors, and whether thebeneficiary’s interest is vested. Proponents of single-claimant QSFs draft the QSFcreation documents with language subjecting the fund to all relevant claims againstthe defendant, see Risk E-mail, supra note 303 (stating that he does so), and recom- Rmend that others do the same. Id. By doing so, it is argued that there is “always apotential that another claimant can surface before the assets of the QSF are distrib-uted.” Id. Thus, the QSF monies are within the reach of the transferor’s creditors.Id. This argument holds so long as there truly are creditors of the transferor. If not,the contention is not necessarily false, but certainly weakened. As to the claimant’svested right to the QSF monies, the discussion of whether the QSF administrator is anadverse party becomes infinitely relevant. The single-claimant QSF proponents’ ar-gument may satisfy the technical language of “vested rights to the money, with receiptconditioned only on the passage of time.” Thomas v. United States, 45 F. Supp. 2d618, 620 (1999) (citation omitted); see Risk, Attorney Comments, supra note 225 (“In Ra QSF . . . the claimant has absolutely no rights to the QSF’s assets until there is anagreement between the QSF and the claimant.”). However, other courts may use dif-ferent language, or look to the function of the QSF and hold the defendant’s transferto give a single claimant such likelihood of receiving the funds that it satisfies theterm “vested rights.” Id.439. Cf. Rev. Rul. 83-25, 1983-1 C.B. 116, 117 (finding economic benefit wheremoneys were ordered to be paid into a trust for holding and future distribution toclaimant).



QSFs note the independence of QSF administrators from claimants,440

the non-adversarial nature must be, and is acknowledged.441

The third argument opponents of single-claimant QSFs make442

is that approval by Treasury would counteract the purpose of the 1982Periodic Payment Settlements Act:443 incentivizing structured settle-ments.444 Use of QSFs by single-claimants will remove the defensefrom the structured settlement process.445 Opponents of single-claim-ant QSFs assert that the defense’s stake in that process promotes theuse of structured settlements; “The practical reality born of industryexperience is that, as a result [of Treasury approval], fewer physicalinjury cases will be settled on the basis of a structured settlement.”446

In addition, opponents argue, once defendant moneys are paid into asection 468B fund in a single-claimant case, “history shows that witha lump-sum in hand the temptation is likely to be too great in a signifi-cant number of cases, such that recoveries are likely to be prematurelydissipated.”447 Thus, because defendants will decreasingly promotestructured settlements, and because single-claimant QSFs will oftenpay lump-sums to their beneficiaries, it is argued that regulations al-lowing single-claimant QSFs to access the structured settlement sub-sidy would thwart Congress’s attempt to increase the use of structuredsettlements.

However, the argument that such regulations would result infewer structured settlements is unpersuasive.448 In fact, the use ofQSFs may increase the use of structured settlements as a consequenceof having additional time to consider structured settlement alterna-

440. See Risk, A Case, supra note 7, at 661; see also Risk, Structured Settlements, Rsupra note 19, at 895. R441. See Risk, A Case, supra note 7, at 657. R442. NSSTA Letter, supra note 14, at 1 (Approval “would significantly reduce the Ruse of structured settlements to resolve the claims of physically injured claimants, andwould thereby undermine the longstanding legislative policy to promote structuredsettlements.”).443. Periodic Payment Settlement Tax Act of 1982, Pub. L. No. 97-473, § 101(a), 96Stat. 2605 (1983).444. See Part II.C–E.445. Risk, Structured Settlements, supra note 19, at 892; NSSTA Letter, supra note R14, at 4. R446. NSSTA Letter, supra note 14, at 4. R447. Id. at 4–5. QSFs do sometimes pay out lump-sums. Staunton E-mail, supranote 378; Russell E-mail, supra note 374 (noting that QSFs typically involve a struc- Rtured settlement); Grassini E-mail, supra note 322. R448. Wood, TAX NOTES, supra note 45, at 74 (“Plaintiff brokers and defense brokers Ralike will still want to sell annuity policies to earn commissions. Whichever type ofbroker is involved, the broker will surely want an annuity to be purchased.”).



tives.449 Claimants sometimes decline the structured settlement optionbecause they lack the time to understand its complexities, choosinginstead the simple form of a lump-sum.450 The tax subsidy’s incentiveis not weaker simply because the structuring is done with a QSF ratherthan a defendant. Secondly, it stands to reason that defendants wouldstill have an incentive to offer a structured settlement option in manysingle-claimant cases.451 Defendants or their casualty insurers haveaccess to all of the structured settlement options available to a QSF.Since the creation of a QSF is more costly and complex, a defendant’sproposed structured settlement can be more competitive. Third, whiledefendants may have less incentive to pursue structured settlement ne-gotiations,452 attorneys specializing in the administration of QSFswould likely encourage the use of single-claimant QSFs. To do so,they would certainly advertise the available tax benefits of structuredsettlements. Likewise, brokers who profit from selling annuities forstructured settlements would also likely promote the option toplaintiffs.

Lastly, opponents of single-claimant QSFs argue that approval oftheir use would inevitably result in abuse of the section 468B tax en-tity.453 It is proffered that tax advisors454 and single-claimants455

would attempt to use section 468B funds to improperly defer receiptof income. In doing so, it is argued, some taxpayers will benefit byinvesting pre-tax dollars.456 Thus, opponents of single-claimant QSFsassert, Treasury should not allow access to the subsidy.

However, the abuse argument is unpersuasive. Robert W. Wood,author of Taxation of Damage Awards and Settlement Payments, and

449. Id.; Russell E-mail, supra note 374 (noting the time-factor as the greatest QSF Rbenefit). Contra McBride E-mail, supra note 322 (stating that the use of a QSF does Rnot encourage the use of structured settlements).450. Wood, TAX NOTES, supra note 45, at 74. R451. Some argue that the danger of lump-sum dissipation is no more present whenmonies are placed in a QSF than during settlement negotiations with a defendant orliability insurer. McBride E-mail, supra note 322. This is because in both cases the Rclaimant does not have ready access to monies. Id. In both cases, monies will only betransferred upon a settlement agreement. Id.452. In fact, defendants may encourage the use of structured settlements, even ifpaying a lump-sum. The defendant could insist on a smaller lump-sum payment byarguing that plaintiff has access to the structured settlement tax subsidy if he or shewishes to use it through a QSF. This would detract, however, from any goal of di-recting more benefits to plaintiffs.453. E.g., Dewey Ballentine Letter, supra note 360, attached memo at 5. R454. NSSTA Letter, supra note 14, at 7. R455. Dewey Ballentine Letter, supra note 360, attached memo at 5. R456. It is also argued that approval of single-claimant QSFs could result in deferralopportunities in non-physical cases. Dewey Ballentine Letter, supra note 360, at 3. R



the recently released Qualified Settlement Funds and Section 468B,457

suggests that the dangers of abuse might equally exist for section468B funds with several claimants.458 Thus, he argues, the possibilityof abuse should not “drive the debate.”459

Proponents of single-claimant QSFs argue that the defense op-poses guidance approving single-claimant QSFs in order to maintaincontrol.460 Opponents argue that single-claimant QSFs are used tocapture annuity commissions for plaintiff brokers.461 Because theTreasury has failed to issue guidance in response to requests,462 thereis much debate over the tax risk to claimants and their attorneys ofusing section single-claimant QSFs.463 It is time for the Treasury toissue guidance specifically providing that single-claimant QSFs can

457. WOOD, TAXATION OF DAMAGE AWARDS, supra note 306. R458. Wood, TAX NOTES, supra note 45, at 74. R459. Id. Depending on the QSF administrator’s willingness to delay distribution, theabuse hypothesis could prove to be accurate. However, doing so would have down-sides; QSF earnings are taxable at the maximum rate for trusts, I.R.C. § 468B(b)(1)(2006), which is currently 39.6%, I.R.C. § 1(e)(2) (2006).460. Risk, Structured Settlements, supra note 19, at 892. Through the use of QSFs, Rdefendants would no longer participate in the choosing of annuities for the structuredsettlement. Risk also argues that the defense would no longer be able to use the taxsubsidy as “bargaining leverage.” Id., at 893. However, this argument is less persua-sive. Defendants who predict or assume that plaintiff will use the QSF to structure asettlement would likely insist on a lowering of their settlement payment. Neff E-mail,Feb. 23, 2009, supra note 32. And, in fact, the possibility of using a QSF is typically Rintroduced early in negotiations. Russell E-mail, supra note 374 (noting that the op- Rtion of a QSF might not be brought up if the attorneys are not familiar with the entity).It would be possible for plaintiff to capture all of the benefits of a structured settle-ment, and thus for Risk’s argument to bear out, if the defendant never learns of aQSFs use. As discussed in Section V.B., this can and does occur.461. Wood, TAX NOTES, supra note 45, at 73. In truth, there is likely merit to the Robservation that commissions are driving much of the single-claimant QSF debate.Id. (“Much of the criticism of the single-claimant QSF, and the abuses to which someargue it is subject, is really hysteria over plaintiffs’ brokers thwarting the structureefforts of defense brokers.”); Wood, QUALIFIED SETTLEMENT FUNDS, supra note 356, Rat 2-42; Neff E-mail, Feb. 6, 2009, supra note 331. Some in the industry have ob- Rserved settlement consultants “abus[ing] the entity to grab the commissions for them-selves.” Darer Interview, supra note 227. In fact, settlement brokers who typically Rrepresent defendants or liability insurers sometimes oppose the use of QSFs becauseof lost commissions. Russell E-mail, supra note 374. See generally Risk, A Case, Rsupra note 7. R462. See generally id.463. See Wood, TAX NOTES, supra note 45, at 76; Risk, Structured Settlements, Rsupra note 19, at 901 (“The risk to the plaintiff’s attorney, therefore, of a legal mal- Rpractice claim brought by his or her client for allowing an adversary to handle thestructured settlement for the client seems to be far greater than any tax risk claimed bythe opponents of the single-claimant QSF.”); Winslow, supra note 360, at 83. Some Rhave asked, if attorneys and brokers who use them are so confident in their interpreta-tion of the tax code and regulations, why are they asking for Treasury guidance on thesubject? Darer Interview, supra note 227. R



create structured settlements within the constraints of the tax subsidy,in the same fashion as multiple-claimant QSFs.

D. An Acceptable Erosion of Tax Doctrines: One Step Further onthe Path

Having recounted and reviewed the available arguments for andagainst the IRS treating single-claimant QSFs in the same fashion asmultiple-claimant QSFs, this Article concludes that doing so is in thebest interest of public policy. Far more clearly than factoring, the ero-sion of tax doctrines for this purpose serves the substantive goal of thelegislated structured settlement tax subsidy.

This Article has demonstrated the initial establishment and subse-quent deconstruction of the constructive receipt and economic benefitdoctrines as applied to structured settlements. At the moment, the IRSfaces the next step: whether or not to deem single-claimant QSFs ca-pable of structuring settlements with payments eligible for the tax sub-sidy. The use of single-claimant QSFs represents yet another level ofclaimant’s control over settlement monies. The claimant essentiallyaccepts the money, and can thereafter decide when and how to use it.This bears resemblance to the revolutionary change in the mid-1990sbrought by the factoring transaction. Claimant was given the ability tocommit to a structured settlement, but retain the power to sell the fu-ture payments at nearly any given time. At first light, it appears thatthe deconstruction of two tax doctrines violates Congress’s originalintent, and perhaps more importantly, contravenes the justification ofpreventing plaintiffs from prematurely dissipating a lump-sum settle-ment. However, allowing the ability to factor could serve the purposefor which Congress created the structured settlement tax subsidy.

What detractors of factoring fail to observe is that claimants losethe tax subsidy upon the sale of their future periodic payments. Whilethe claimant has benefited from receiving the earnings of their preced-ing periodic payments tax-free, in deciding whether to factor, theymust weigh the need for the upfront money against the incentive ofcontinued subsidy availability.464 That continued subsidy is obtainedonly if the claimant acts in conformance with Congress’s encourage-ment, choosing not to factor. Of course, the high discount rates some-times incurred may reduce the value that the claimant received fromthe settlement below that which he or she might have obtained by

464. The lump-sum payment from the factoring company is received tax-free. I.R.S.Priv. Ltr. Rul. 1999-36-030 (Sept. 10, 1999). However, as the factoring companycannot exclude the periodic payments as the claimant could, it will not compensate theclaimant for that value.



taking a lump-sum to begin with. However, the need for money mayoutweigh the market price.465 Congress’s concern that a claimantmight prematurely dissipate lump-sum settlement monies is only rea-sonable to the extent that it discourages irresponsible, rather than fastspending. Thus, factoring is not necessarily in direct opposition toCongress’s original intent. What is important is that the tax subsidyoperates to incentivize the use of structured settlements. Though fac-toring allows a claimant to sell their future periodic payments, the taxsubsidy operates as a continuing incentive not to. Thus, it serves theoriginal purpose of Congress’s legislation, while allowing for actionsresponding to extenuating circumstances. Either way, Congressdemonstrated a willingness to bend or break the doctrines of construc-tive receipt and economic benefit as applied to structured settlements.

Likewise, the single-claimant QSF may violate the relevant taxdoctrines, but it maintains, or even bolsters the effectiveness of the taxsubsidy. It is true that the transfer of defendant’s monies into a single-claimant’s QSF gives that claimant substantive control of the money.However, so long as the IRS treats single-claimant QSFs as it doesmultiple-claimant QSFs, the tax subsidy will incentivize the claimantto create a structured settlement. A claimant can choose not to useone, but he or she could make the same choice during negotiationsover a structured settlement with the defendant. In fact, the time pro-vided by the QSF may make the use of a structured settlement morelikely. In addition, the use of the QSF may serve to direct a greaterpercentage of the tax subsidy toward the claimant, rather than the de-fendant. If true, the incentive to use a structured settlement would befelt more strongly by claimant in a QSF than during plaintiff-defen-dant negotiations.

Thus, any deconstruction of the constructive receipt and eco-nomic benefit doctrines through the use of single-claimant QSFs,when creating structured settlements, does not depart from structuredsettlement legislative or regulatory history. Moreover, it is consistentwith Congress’s stated justification for the tax subsidy. In fact, single-claimant QSFs’ ability to access the structured settlement subsidy mayassist the effectiveness of the subsidy itself.

465. As noted, some factoring companies charge rates far in excess of the marketprice. Limitations of such rates, and perhaps increased judicial scrutiny, are likely inthe interest of public policy.



CONCLUSION

This Article has demonstrated that though Congress initially es-tablished the structured settlement tax subsidy with the constraints ofthe economic benefit and constructive receipt doctrines, both havebeen eroded over many years. And, in fact, that erosion may serve theoriginal purpose of the tax incentive: encouraging the use of structuredsettlements in order to discourage the irresponsible dissipation oflump-sum settlements.

After Congress passed the legislation in 1982, defendants andtheir liability insurers began capturing a large portion of structuredsettlement benefits. This works against public policy by decreasingthe cost of risk-taking, and by decreasing plaintiffs’ incentive to struc-ture, except upon defendants’ request. Directing those benefits awayfrom defendants and toward plaintiffs, so long as doing so does notdecrease the use of structured settlements, serves the interests of pub-lic policy.

The use of single-claimant qualified settlement funds does justthat. By shifting control of the structuring of a settlement into plain-tiffs’ hands, and by providing more time for plaintiffs to decidewhether to structure, single-claimant qualified settlement funds makethe use of structured settlements more likely. The lengthened timealso increases the probability that the structuring of the settlement willaccurately schedule future payments to correspond with future needs.Doing so may decrease the likelihood of later factoring, and thus pos-sible premature dissipation.

For these reasons the IRS should issue guidance stating that sin-gle-claimant qualified settlement funds are capable of structuring set-tlements with the resulting periodic payments being eligible for thestructured settlement tax subsidy.


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